Archive for February, 2013

Mark Yockey Transcript 2/22/2013 #935

WEALTHTRACK Transcript

#935- 2/22/13

CONSUELO MACK: This week on WEALTHTRACK, a rare interview with a great global investor.  Artisan International Fund’s Mark Yockey explains why his worldwide hunt for growth has led to big game profits in Japanese auto stocks, foreign beer companies and Chinese casinos. Award winning fund manager Mark Yockey is next on Consuelo Mack WEALTHTRACK.

Hello and welcome to this edition of WEALTHTRACK, I’m Consuelo Mack. One of the hallmarks of many of WEALTHTRACK’s Great Investor guests is their contrarian streak. Legg Mason’s Bill Miller recently gave us his rationale for buying home building and airline stocks beginning in 2011. Skeptics abounded then.  They are more circumspect now after those holdings and other then “untouchables” propelled his Legg Mason Opportunity Trust to the number one mutual fund slot last year with its 40% plus gain.

This week we are talking to another acknowledged Great Investor who is not afraid to go where others fear to tread as he scours the globe for “sustainable growth at a reasonable valuation.” We have a rare television interview with Mark Yockey, long time portfolio manager of the Artisan International Fund, for which he was named Morningstar’s International Stock Fund Manager of the Year in 1998 and named a finalist in 2012 for, as Morningstar puts it: his “outstanding record”- Artisan International has trounced its peers and benchmarks since its 1995 inception as well as over the last ten years. Yockey has also run the highly regarded Artisan International Small Cap Fund, since launching it in 2001 and the younger Artisan Global Equity Fund started in 2010.

Among the countries Yockey and his team have major stakes in are out of favor Japan, at more than 12% of his fully invested stock portfolio; volatile China which is at 8%, include Hong Kong and it jumps to 16%; and Germany at nearly 19%. Among Yockey’s approximately 75 stock positions are sizable holdings in Japanese tobacco and automobile companies, Chinese internet and insurance firms and global beer companies. What do they all have in common? I asked Mark Yockey to tell us.

MARK YOCKEY:  We look for companies that sell value-added services and products or have a unique collection of assets that will allow them to charge a premium for what they’re selling, and all the companies that you just talked about, whether it be Honda in Japan or whether it be AIA, the insurance company in China or Baidu, the Google of China, or whether it be Ambev, the beer company, they all have products that they’re able to charge a premium for, and when you can charge a premium for your product, you make higher profits than other people do, and you can reinvest those profits into your business to grow faster.

CONSUELO MACK: Now, you’re known as a growth fund versus value. How did you choose to focus on growth?

MARK YOCKEY:  Well, growth means your earnings are growing over the cycle, and we’re long-term investors, so we want to invest along with the company and watch them grow. So we’re looking for companies that are doing the things that we think are going to allow them to grow going forward. And what happens is over time, if you compound your growth rate, you compound your appreciation. So if you can grow at a 10% compounded rate of return over a period of time, your earnings and your stock price generally double fairly quickly.

CONSUELO MACK: So the focus on growth versus value, and forgive me if it’s not that important for you, but there’s a definite distinction that money managers make, but it’s sustainable growth at reasonable prices, right? So you’re not looking for the deep value company. What are the kind of prices that you’re willing to pay for a company?

MARK YOCKEY:  It’s probably important to know that we only invest in companies that sell value-added products and services. So we’re not looking for commodity companies. So if you’re doing something that everybody else is doing, we probably don’t want to invest in you, but if you have something unique how you do it or what you’re selling, or the assets that you have like a railroad, for instance, then…

CONSUELO MACK: Canadian Pacific, for instance.

MARK YOCKEY:  Canadian Pacific which has been a big stock for us.  These are all the kinds of things that we look for, and these kinds of companies tend to generate higher returns over the cycle, and when you compound those returns, it allows you to make more money for your investors.

CONSUELO MACK: So the competitive edge is one of the things that you look for and leadership in an industry, and I know that you’re looking for superior management, superior results. So again, how do you differentiate? I mean, what do you mean by superior? What is it that you look for specifically? And certainly give me some examples.

MARK YOCKEY:  Well, you’re right. Everybody says they look for good management. Nobody ever says they look for bad management, so we’re equally guilty. We look for good management, but for us what that means is good management is people that have shown that they have a history of being successful in what they’ve been doing. So if they’ve done it before or done it before a couple of times, you know what? You probably want to pay attention to those people, because it’s more than likely that they’re going to be successful in the future. And so those are the kinds of managements that we’re looking for.

CONSUELO MACK: So this is a culture in a company, not a specific management team. So it’s something that you want to be able to… you’re going to look at a company. You’re going to say, “We know that they’ve got a deep bench. We know the kind of training that they give their executives, so this is what we look for. Consistency over many cycles.” I mean, you’re long-term investors, so you hold onto companies.

MARK YOCKEY:  That’s a good point that you make. It’s the culture of the management that runs the company. So our goal is to find a good collection of assets that we’re investing in, and then find good stewards of those assets. So I’ll give you an example of a company that we have, a company called Henkel in Germany, and for years and years and years, it didn’t do anything. It’s kind of an unusual collection of assets. They sell glue which, in the business world, is known as adhesives. I guess you can charge more if you call them adhesives, and then the other business is they sell shampoo and personal care products, but both are great businesses. They are leaders in both businesses. For years, it didn’t do anything. New management came in a few years ago, and they’ve totally turned around the company, and the stock has doubled. So those are the kinds of things we look for. Ambev is another example where Budweiser was an average stock for a long, long time.  It didn’t go up, didn’t go down, and the company was taken over by some Brazilians, and since that time the stock has been a moon shot.

CONSUELO MACK: So let me ask you about another kind of theme that you have which is thematic investing as well, because you say at Artisan that at the core you’re stock pickers, but you also look for big thematic investment trends. So what are the big themes that you’ve identified?

MARK YOCKEY:  Well, one of the big things that we think has been going on for some time and people have talked about, but we think people underestimate the legs that this theme has, is the emerging markets consumer, and people say, “Why is that important?” And that’s important because it’s just like what Willie Sutton said when people asked him why do people rob banks, and he says, “Well, that’s where the money is”; and it’s the same with the emerging markets consumer. The U.S. consumer doesn’t have more income in general than he had 10 years ago, maybe less. The average consumer in Europe has less income than he had 10 years ago, but the average consumer in Asia and in Africa and in Central Europe and in Russia has a lot greater income than he had. So we want to find companies that are selling products to these new consumers around the world, because that’s where the growth is going to be.

CONSUELO MACK: And do you tend to focus on companies that are, again, competitive edge large companies that have a global footprint that are selling into those countries, or are you also looking at… because I know you’re running a small cap fund as well. Are you also looking at companies that are in those countries that are selling to their domestic markets?

MARK YOCKEY:  Sure, it’s exactly the same process for both the funds, but we love these companies like Unilever and Nestle that are big monsters that have this tremendous footprint in emerging markets, and they sell products that are aspirational. For someone in Indonesia, to buy a candy bar is a big deal. For us it’s something that we do at the drop of a hat, but in a lot of the world to buy a package of cigarettes or to buy a pack of candy is a big deal, and those are aspirational purchases. It gives them a little bit of luxury for not very much money, and there’s a handful of companies that dominate this business, and we own most of them.

CONSUELO MACK: Let me ask you, because one of the things that you said in a pre-interview was that Coke and cognac was a combination in looking at China. Looking at your portfolio, you’ve got a fairly sizable position of companies that are in China. What’s the Coke and cognac theme that you’re following up on?

MARK YOCKEY:  Well, it’s not just the French people that like cognac, although they drink certainly their share. The other people that like cognac in the world in particular are the Chinese, and they love cognac, and they’re drinking it by the gallon.  Right now only about one percent of all the alcoholic beverages consumed in China are imported, but cognac is the biggest part of that. In fact, it’s probably 80 or 90% of that, and it’s growing at about 25% a year, and it’s still mainly only consumed on the coast where the big cities that we know, Shanghai and Beijing, where those places are located, and now the consumption is starting to move inland as the incomes of the people inside China are growing faster. And so Pernod Ricard was considered… the stock got hammered when they bought Absolut because they paid too much for it, and we bought it after that, and now they’ve been growing at 20 to 25% in Asia for the last five years, and the stock has gone from 40 to 90, and so those are the kinds of things that we look for.

CONSUELO MACK: So when you have a stock that’s gone from 40 to 90, obviously you’re seeing how their business is going as well, so what would make you reduce your holdings in Pernod?

MARK YOCKEY:  You know, these companies, Consuelo, are unique assets. There’s only one company that dominates cognac sales in China, and it’s Pernod, and so for us to sell it, it means it’s going to have to get overvalued, significantly overvalued. They just reported their earnings today, and they’re better than expected, the stock was up two or three percent in a down market. And you know what? Next year the Chinese are going to drink 25% more cognac than they did this year, and the year after that, they’re going to drink 25% more again. So these are intrinsic inherent growth stories that are just wonderful companies.

CONSUELO MACK: So another activity that the Chinese love is gambling, and you’ve been a major investor in some Chinese gambling casinos.

MARK YOCKEY:  That’s a great story. When Las Vegas got in trouble after the ’08 recession, the banks told the casinos in Las Vegas that they had to list their Macau subsidiaries.

CONSUELO MACK: So Wynn Macau, for instance, was one of your holdings.

MARK YOCKEY:  So Wynn Macau and Sands Macao were forced to go public in Hong Kong, and that allowed us to invest in them, because we were only investing in international companies.

CONSUELO MACK: Did you invest in them as IPOS ?

MARK YOCKEY:  As IPOs.

CONSUELO MACK: You did.

MARK YOCKEY:  And then we continued to invest in them for a long time because these companies had never existed before in Asia, and so people didn’t know what to do with them, and people didn’t really understand the American mentality of gaming either, because the Las Vegas gaming is much different than the historical Chinese gaming in Macau which was kind of pretty low-end, just gaming; no dinners, no entertainment, nothing like that, pretty dive-y hotels, and the Las Vegas ways, nice hotels, nice restaurants and just making it an event rather than just going to gamble. And these companies have been moon shots. They’ve all gone up between 100 to 400% since we’ve invested in them.

CONSUELO MACK: Now, as a result, you have pared back your holding in Sands, for instance. I don’t know about Wynn. So you’ve made decisions there that you’ve decided to basically reduce your holdings. Based on valuations, is that the reason or… ?

MARK YOCKEY:  Based on valuations. Just as a historical point of reference, Macau does about $40 billion in gaming revenues a year, and Las Vegas does six.

CONSUELO MACK: Wow. I had no idea it was that different.

MARK YOCKEY:  So Macau is seven times as big as Las Vegas. When we invested in these things, when we were doing research on these things, people would talk about when would Macau become as big as Las Vegas, and it’s seven times bigger now. So they’ve done well, and they’ve gone up a lot, and so we’ve reduced our holdings a little bit. We still own them. We’ve love them to come back a little bit, and we’d love to buy them back.

CONSUELO MACK: So is that also something that you do frequently, that you have companies that you’ve owned, you’ll sell when they get overvalued by your standards, and then you’ll come back and buy them on dips or downturns?

MARK YOCKEY:  Sure, sure. For some reason, whatever, a few months ago Sands people were nervous about the casinos, and Sands went from 35 Hong Kong down to 25 Hong Kong, and so we bought a bunch of stock at 25, and now it’s almost 40, and so we’ve reduced our holdings there a little bit. It’s a great company, and they’re really well positioned to benefit from gaming going forward.

CONSUELO MACK: So Baidu is another holding, Chinese holding of yours, the search engine, Chinese search engine, and they’ve certainly had their ups and downs over the last several years. So what’s your current view on Baidu?

MARK YOCKEY:  I think investors totally misunderstand the story. They’re being penalized for just acquiring the YouTube of China. YouTube U.S. is a $4 billion business and growing like a weed. The Chinese want the same thing as Americans do. They want to have entertainment. They want to have a quick look at whatever is popular at the moment, and they’re being penalized because it’s losing money. The other thing that’s going on is there’s this huge move around the world to mobile search as opposed to search on your PC, and so right now they’re giving it away in China, mobile search.

But the way I look at it, the way we look at it is mobile search is even more valuable than search on a PC, because if you’re doing it on your cell phone, it means you probably want to do something right away. Otherwise, you’re walking down the street in New York or Kansas City or San Francisco, you hit Yelp or whatever the app is to find a restaurant or to find a hardware store or to find a tire store, whatever you’re looking for, and that’s a transaction-oriented business. So that search ought to be worth more. Right now they’re giving it away. In a few years, mobile search is going to be three times as big as fixed search on your PC, and this hasn’t been monetized at all, so you know what? Personally, I think Baidu is going to double over time.

CONSUELO MACK: So explain. I’m going to shift. I’m going to stay in the same region, but I’m going to shift focus. I’m going to shift countries, and that is Japan, because you definitely have some companies that you’re invested in in Japan. One of them is Honda. So why a Japanese automobile company?

MARK YOCKEY:  Well, it’s a great product. They don’t discount their products or they discount much less than the competition, and a couple of things have changed recently. They came out with all new models, and car companies make money on new models because they don’t have to discount them as much, and the second thing that happened is a new fellow was elected Prime Minister of Japan, and his name is Abe.

CONSUELO MACK: Right, Shinzo Abe.

MARK YOCKEY:  Shinzo Abe, and his goal is to weaken the yen because he knows that the Japanese companies need a break, because the yen’s been going up for the last 15 years, and they’re not competitive at 75 to the dollar. Since he’s come in, the yen has gone from 75 to 95, and you know what? It could go to 100 or 110. So Honda already was making good profits at 75, so if you say at 95, they’re going to make a ton of money. You know, another three or four billion dollars more a year, and on top of that Honda is really an American car company. It’s not really a Japanese car company, and the best market for cars in the world right now is the United States. It’s the fastest growing and it’s the most profitable. So they’re in the best markets, and they have some of the best products, and the yen’s gone down 20%.

CONSUELO MACK: What’s the most contrarian position that you’ve got in your portfolio right now at Artisan International?

MARK YOCKEY:  Oh, gosh. That’s a tough one.

CONSUELO MACK: I mean, Japan’s pretty contrarian, but…

MARK YOCKEY:  Japan, we own all three of the autos, the three major autos. I think Baidu is pretty contrarian. It’s a pretty unloved stock right now. The stock was 150. It’s down to 95.  People have lots of bad things to say about that.

CONSUELO MACK: Another question we were just talking about, the macro picture, and you’re a stock picker, and your kind of philosophy is that if you pay the right price, if you buy at the right price, it’s going to protect you on the down side. We went through a financial crisis where your portfolio wasn’t really protected on the down side by that approach. So what lessons did you learn from the financial crisis as far as did you change your strategy at all since then? What were the take-aways for you as a money manager?

MARK YOCKEY:  Well, one thing we did in ’08 is we had more direct exposure to emerging markets, and one thing I think that I’ve taken away from what happened in ’08 is, well, one lesson is get out of the way when the world’s collapsing, but the second lesson is be careful of emerging markets companies in a bear market, because they get slaughtered, and there’s no buyers. But that said, the important thing is, I think for investors in general, is invest in good companies and invest in quality franchises. Invest in companies that are doing something that everybody else can’t do. You know what? You’re going to do fine. Stocks go up and stocks go down, but over a cycle if your earnings grow, your company is going to be worth more at the end of the day than it was at the beginning.

CONSUELO MACK: So if you’re invested in quality, don’t freak out, because they’re going to get affected in these big macro moves like everyone else, but nonetheless, from your point of view, you should just stick with them.

MARK YOCKEY:  That’s exactly right. Buy good companies, because you know what? The companies are run by people that hopefully are going to make adjustments for whatever the economic environment has. Look at American companies. They’ve made wonderful adjustments to reflect what’s going on, and companies are making record profits in the United States.  And you know what? The same thing is happening in Europe. People talk about all the bad things that are going on in Europe, and people forget that companies like Unilever and Nestle are having blowout numbers every year.

CONSUELO MACK: So that was another thing that I was going to ask you about, because one of the things that you told me earlier was that you got to really learn how to ignore the headlines. So what are the headlines that you do pay attention to, for instance, and what are the kind of things that, you know, again, the bigger picture that you are tracking that you’re not going to ignore?

MARK YOCKEY:  Newspapers and the media love to talk about what’s wrong, and I guess you don’t sell as much of whatever you’re selling if you talk about what’s right. Maybe it’s part of human nature. But in international, it’s even more of a problem because people living in the United States hear a story about Italy or Spain, and they think the world’s ending, but in actual facts, Spanish companies and Italian companies and Portuguese companies and Irish companies are adjusting just like our companies adjust. In the small cap fund, we own a company in Ireland that’s gone up 50% in the last year, so it’s really invest in good companies. That’s the key to the story.

CONSUELO MACK: So you usually are fully invested pretty much. I mean, that’s kind of your mandate to yourself, but looking at the big picture and some of the themes that you’re following as well, so what are you paying attention to? What would be a game changer as far as you’re concerned? I don’t know whether it’s the central banks when they stop their quantitative easing. What are some game changers that…?

MARK YOCKEY:  That’s a big one. You know, one thing is quantitative easing. If Bernanke and Draghi and Europe and Abe and whoever the new head of the central bank of Japan changed their view of easing globally, I think that would be a trigger. I think a big increase in inflation would be a trigger, but you can’t have inflation if you don’t have wage growth, and there’s no wage growth in America or there’s no wage growth in Europe so that, to me, is not a near-term negative. You know, bonds I think are a tough place to be. If there was a big hiccup in the bond market, that would be a concern, but again, interest rates probably shouldn’t go up a lot because, you know what, there’s not income growth, so there’s not inflation.

CONSUELO MACK: So Mark, let’s focus on some good news which is that you think that global markets are undervalued.

MARK YOCKEY:  Consuelo, I think they’re way undervalued. When I look at the stock yields I’m getting versus the bond yields that are available from the same company’s bonds, I see companies in the portfolio that have stock yields that are at five and six percent and the bond yields on the underlying bonds of the same companies are yielding two and three. Historically, that’s an anomaly that hasn’t lasted for a long time, and a lot of these companies are trading at 12 and 13 and 14 times earnings, and their earnings are growing at 10, 12%. Their dividends are growing. They’re buying back stock. I can’t imagine that the stock market’s going to be where it is today in a couple of years.

CONSUELO MACK: So are you like a child in a candy shop? I mean, do you feel that there are a lot of really great compelling values out there?  So it’s actually hard choosing the companies that you want to invest in?

MARK YOCKEY:  We’re having no problem finding companies to invest in. It’s really having to cull it down to the select ones that we want to be in.

CONSUELO MACK: U.S. market- your view of the U.S. market versus the others.

MARK YOCKEY:  I like U.S., too.

CONSUELO MACK: One Investment for a long-term diversified portfolio. What should we all own some of in a long-term diversified portfolio?

MARK YOCKEY:  There’s a company called Covidien. It’s kind of a U.S. company, but it’s kind of a European company. It’s listed in the U.S., but it’s domiciled in Ireland, and it’s trading about 13 times, and they’re selling a lot of products to the hospital industry, and there are a lot of high value-added products for things like microsurgery and staplers and things like that, and…

CONSUELO MACK: Surgical staplers.

MARK YOCKEY:  Surgical staplers, you know, and the company’s growing about 10% a year. They make good acquisitions over time. The company’s dirt cheap, and it should trade at a much higher multiple.

CONSUELO MACK: So competitive edge at Covidien?

MARK YOCKEY:  It’s the technology. They’re competing with J&J. J&J’s a tough competitor, but these guys are doing just fine.

CONSUELO MACK: So thank you, Mark Yockey. It’s so lovely to have you on WEALTHTRACK for the first time.

MARK YOCKEY:  Great to be with you.

CONSUELO MACK: We will have some additional insights from Mark Yockey, some of a more personal nature on our website, wealthtrack.com, in our Extra section.

At the conclusion of every WEALTHTRACK, we give you one suggestion to help you build and protect your wealth over the long term. This week’s Action Point is: beware the consensus view. Right now the investment world is becoming much more relaxed about global economic and financial stability. The thinking is Europe’s financial crisis has passed, as has that of the U.S.; the U.S. economy is improving, and China has avoided a hard landing. As a result, market volatility is near multi-year lows and investors are becoming much more bullish towards stocks. As Bank of America Merrill Lynch research recently illustrated, investor sentiment is in the greed territory.  All of this complacency is price into the markets. As WEALTHTRACK guest Andy Lo reminded us recently, it won’t take much of a scare to shake the market up, so don’t abandon your insurance policies of cash, treasuries and gold. They may come in handy.

Next week, as public television stations around the country begin their spring fundraising drives we are going to revisit our interview with investment legend Jack Bogle who has some constructive criticism for the industry he loves and a lifetime of advice for individual investors. He is a treasure. If you have missed any of our past Great Investor or Financial Thought Leader guests you can find them on our website, wealthtrack.com. You can also see our new programs 48 hours in advance as a Premium subscriber, and see additional and extended interviews in our WEALTHTRACK Extra feature. In the meantime, thank you so much for spending your valuable time with us. Have a great week and make it a profitable and a productive one.