Archive for February, 2013

Perks & de Lardemelle: Income vs. Protection With Two Leading Fund Managers

February 15, 2013

Franklin Income Fund has delivered monthly payments to shareholders since 1948! Portfolio manager Edward Perks explains how he is carrying on the tradition. Plus IVA Worldwide Fund’s Charles de Lardemelle explains where he is finding value and protection around the world. Continue Reading »


February 15, 2013

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Perks & de Lardemelle on Alternative Investments

February 15, 2013

Perks & de Lardemelle Transcript 2/15/2013 #934

February 15, 2013


#934- 2/15/13


CONSUELO MACK: This week on WEALTHTRACK, our investment targets are income and capital preservation. Portfolio manager Ed Perks hits the bullseye every month with his Franklin Income Fund, while Chuck de Lardemelle aims for portfolio protection at IVA Worldwide. Income and protection are next on Consuelo Mack WEALTHTRACK.


Hello and welcome to this edition of WEALTHTRACK, I’m Consuelo Mack. For years, a Mack family motto has been “facta, non verba”; English translation, deeds, not words! It seems investors are just beginning to take note. They have been talking a more bullish game for several months now, the question is will they really put it into action and start buying stocks in earnest? The theory being, that’s what it’s going to take to extend the now four year old bull market.


One of the Street’s earliest bulls is asking a different question- does it really matter if investors come back? If they were pulling hundreds of billions of dollars out of the stock market for the last four years, then what explains its impressive performance? The surprising answer from widely respected economist and strategist Ed Yardeni is illustrated in this chart from one of his recent morning briefings. According to Yardeni, it’s corporate cash flows that have been “powering the current bull market.” Corporate stock buybacks have been soaring and dividend payments have been rising since the second quarter of 2009, more than offsetting investor withdrawals. All indications are with record amounts of cash still on their balance sheets, companies are going to continue to buy back shares and increase dividends. Corporate profits are at record levels, as are their cash levels and dividend payouts ratios are around 30%, way below the post-World War II average of 50%. As the still bullish Yardeni says, it will be a heck of a party if retail investors join the party.


On WEALTHTRACK this week we are welcoming two new guests to our lineup. Both run global mutual funds that can invest across asset classes. Each has a distinctive style and objective, each has a proven track record. Edward Perks is Director of Portfolio Management at the Franklin Equity Group and has been a portfolio manager of the Franklin Income Fund for the last decade. The fund has paid a monthly dividend continuously since 1948. The $70 billion dollar fund currently yields over 6%, and has delivered annualized returns of around 9% over the last ten years, including a 14% gain last year. It ranks near the top of its category short and long term.

Charles de Lardemelle is a founding partner of International Value Advisers and a portfolio manager of the IVA Worldwide and International funds. Prior to launching International Value Advisers in 2008, in the middle of the financial crisis, Chuck spent many years at the First Eagle Funds under the guidance of legendary value investor Jean Marie Eveillard. I began the interview by asking each of them, as newcomers to WEALTHTRACK, to briefly explain the mission and philosophy of each of their funds.


ED PERKS: We try to make it somewhat simple and, as you suspect, Franklin Income Fund is about income, and that is really what we’re first and foremost trying to do is capture attractive income for our investors. We do distribute that income monthly. It’s something that the fund has done on an uninterrupted basis since 1948, so this is not something that we just decided sounds like a good idea.


You know, secondarily, we do have the objective of seeking value and the potential for capital appreciation over the long term, and really we seek that objective by trying to have as broad an opportunity set as possible, so we do look across a wide range of asset classes across fixed income, considering everything from Treasuries and agencies and mortgages into corporates and high-yield bonds, and then on the equity side common stocks, preferred stocks, convertible securities can make up a significant part of the portfolio, and it’s really that flexibility, having the resources internally at Franklin Templeton and then just driving. Where is the income that is also attractive from a longer-term standpoint?

CONSUELO MACK: All right, and I will ask you in just a minute where the income is. At any rate, so Chuck de Lardemelle, great to have you here as well. So tell us about the IVA Worldwide Fund.

CHUCK DE LARDEMELLE: It’s a peculiar fund in the sense that we’re trying to deliver equity-like returns but over a full cycle from peak to peak or trough to trough in the economy and at times in order to do that with as much capital preservation as possible, we will use different asset classes when they provide equity-like returns. So for instance, during the ‘08/’09 crisis, we used a lot of credit tools, bonds, and when we can find opportunities that are attractive enough, then we will sit in cash. We can also use gold. And we can roam the world- large cap, small cap anywhere in the world.


CONSUELO MACK: So Ed has a mandate for income, and the Franklin Income Fund yields about six percent right now. Your mandate… so what would I expect from you? I know you talk about absolute return, for instance, so…

CHUCK DE LARDEMELLE: All right, first and foremost capital preservation and, second, over the cycle we want to do as well or better than equities.

CONSUELO MACK: All right, equities being the S&P500, for instance?

CHUCK DE LARDEMELLE: Correct, correct.

CONSUELO MACK: All right. Do you buy into the new normal? What’s your view of what our expected returns should be?

ED PERKS: I think there’s two aspects of new normal. One is the capacity for economic growth in developed economies, and maybe that new normal is a lower rate of growth than we’ve experienced historically, and that has to do with a lot of the challenges that are embedded in the fiscal situation, whether it’s in Europe or in the U.S., and that’s something that we’re real time dealing with. Now, interestingly, though, we’ve seen more recently, last year, we actually had some pretty strong returns from different asset classes, from equities in particular. So I think it always depends on where you’re starting at from a valuation standpoint. We think the returns have been attractive, can still stay attractive for a reasonable amount of the equity market, and that’s certainly where we’re focused.


CONSUELO MACK: And I’ll ask you about the bond market in a minute. So new normal, do you think that investors should expect lower returns, you know, since the financial crisis, for instance, than they would have gotten in the previous post World War II period?

CHUCK DE LARDEMELLE: Not only lower returns but perhaps also higher volatility, because you have more leverage in world economies. Therefore, economies are likely to be more volatile, and I would say that the financial, the global financial system is very much distorted by heavy-handed action by different central banks around the world, and that does worry us.

CONSUELO MACK: And distorted, I mean, how is that showing up?

CHUCK DE LARDEMELLE: Well, it’s showing up in the price of gold, for instance. That’s going up and has been going up for about 10 years. That’s really driven by money printing by a number of central banks around the world. There are now talks of competitive devaluations by the Japanese and are very heavy distortions on interest rates, on long-term interest rates. They are now providing less than inflation, and so that we think means that there are higher risks than there used to be in the financial world today.

ED PERKS: I think that’s certainly the case. I mean, you look in the U.S. fixed income markets. There’s as much evidence of that dynamic playing out as there is anywhere in the world with long-term interest rates now arguably at negative real 10-year rates.

CONSUELO MACK: Right, across the world.

ED PERKS: Yeah, and I think it becomes almost a mathematical certainty that the new normal in certain segments of the fixed income market will be lower returns. I mean, it’s just we have much lower coupons today, much lower yield levels, and that’s just pure mathematics.


CONSUELO MACK: Right, so let’s talk about what’s happening in the bond market and, as you all know, that individual investors and institutional investors have overwhelmingly been favoring bonds over stocks. You at the Franklin Income Fund have made a major shift in allocation from bonds to stocks. Tell us about that, what’s going on and why you’re doing that?

ED PERKS: Yeah, that’s certainly something that’s played out a little bit more recently in 2012 in particular. You know, going back to the last three to five years, we did have a higher emphasis on fixed income markets, on fixed income securities in the portfolio than we normally have had. And some of that was out of the opportunity that existed at that time, meaning we had higher overall interest rates, and we also had very wide corporate credit spreads, and that’s something that we felt very compelled about that opportunity on an income basis, on a total return potential basis as well as volatility and overall level of risk we were taking in those securities.

CONSUELO MACK: And it certainly worked for the Franklin Income Fund.

ED PERKS: It has. It has benefited from the tailwind that has been lower long-term interest rates. The actions of the Federal Reserve, of the global monetary authority certainly have encouraged investors to look for other riskier assets and, as you alluded, that was certainly a response to the financial crisis was safety and fixed income investing. We’ve seen that in the flows across a wide range of markets. You know, but at this point we’re compelled to start looking for other asset classes, and it’s not that we can’t still find some opportunities in fixed income, but on balance we’re finding more opportunities. So our weighting just in the last 12 months has flipped, where fixed income a year ago had a predominantly role in the portfolio. We’ve now reversed that, so from roughly 55%  fixed income down closer to 40%, and equities have gone the other way.  So we don’t like to hold a lot of cash in Franklin Income Fund.  It is a significant drag on income. It’s not what we think our investors are asking us to do.

CONSUELO MACK: Right, and you have an income mandate.

ED PERKS: Correct, correct. That’s what’s probably the most interesting aspect of it today. Normally I would say when you shift from fixed income to equity, you have a real detriment or a pullback in your overall level of income, and today, given where fixed income yields are and where dividend yields are and, more importantly, where dividend yields are going, I think that creates a really compelling opportunity. Many of the companies that we’re investing in today, and these are very high-quality, well-known, global players…


ED PERKS: Such as Merck, a substantially higher dividend yield on the common stock than is available on their long-term debt securities.

CONSUELO MACK: On their bonds, right.

ED PERKS: And that’s a dynamic that one company after another you can cite and see, and that’s something that we don’t normally see. So you know, to us, that opportunity for yield now is biased more toward certain segments of the equity market. We still think the valuations, although there’s been a lot of talk about the global search for yield, you know, we don’t think it’s really progressed very far at all, and it’s still very compelling.


CONSUELO MACK: So Chuck, you might have a slightly different view. When I talked to you in a pre-interview, you basically said that you’re positioning your portfolio more defensively as far as your equity positioning, and you feel that the dividend plays that Ed is talking about are actually expensive. So tell me what you’re doing at IVA Worldwide.

CHUCK DE LARDEMELLE: Well, we certainly have the same view that in terms of asset classes, equities today are a better…

CONSUELO MACK: Than bonds.

CHUCK DE LARDEMELLE: … asset class than bonds. It’s a better house in a bad neighborhood. We want to be somewhat conservative, because we do not believe that equities in the U.S. are that cheap, I would think, or all that fairly valued. If you look at market capitalization to GDP, which is the price to sales ratio, today in the U.S. market you are 110%. Over the long term, you were 90%, so it shows a little bit of over valuation. It’s driven in good part by extraordinary profitability by U.S. corporations.

CONSUELO MACK: Right, record profits.

CHUCK DE LARDEMELLE: That’s right. So I think the stock picking can help a lot. We are about 60% in equities that you have in the Worldwide Fund. Of that, you have about 30% in the U.S., about 15 in Europe and about 10 in Japan. And in Japan you see the same dynamics where the dividend yields there can be as high as three, four percent with a 10-year yield that’s at 0.75, so you have that discrepancy that’s very much there, and the payout ratios tend to be fairly low in Japan. It’s been a value market for a long time. It is a cheap market around tangible book and the question is whether or not they can snap out of deflation.


CONSUELO MACK: So are you repositioning your portfolio as dramatically as Ed is, and again, if 60% equities is considered to be a defensive position, other things that you’re doing. I mean, you’ve always had a gold position about five percent now, but your bond position is low, right? Relatively low?

CHUCK DE LARDEMELLE: Low. Well, we have about 10% in high-yield, but it’s the remnants of what we bought in ’08, ’09 where credit provided more equity-like returns at the time with we thought a lot less risk, and it turned out to be the case. Our high-yields are very short in duration, so it’s really a portfolio that’s expiring, and as it expires, we either put the money to work in equities if we can find the right names or we let the cash build up. So today we’re about 25% in cash if you include the senior European government bonds which is a way for us to park the cash outside the U.S. dollar, because we do not trust Bernanke and his policies.

CONSUELO MACK: And you don’t trust them because you think that they are… because they’re going to be inflationary eventually and that it’s going to debase the dollar? Is that why you want to be out of… ?

CHUCK DE LARDEMELLE: Yes, the debasing of the dollar is his policy we believe, and we don’t know where the red line is in terms of confidence in the dollar, and we don’t have great confidence in the ability of central bankers around the world to manage a very complex world economy.


CONSUELO MACK: So where does that leave one in the search for income? The fact is that we’re in an income-starved yield, and yet you keep finding income, six percent yield right now in the Franklin Income Fund and a little bit higher than that. So where are you finding income?

ED PERKS: You know, I think that opportunity is actually improving. Last year we had I think a 20-year high in the number of companies in the S&P500 that either initiated or increased their dividend, and today over 80% of the companies in the S&P 500 pay a dividend, and it’s a much broader opportunity set across a wide range of sectors. When you look at that 80% of the S&P500 and look at the average kind of yields available, particularly relative to the fixed income market, you know, we think it’s very compelling, and you mentioned payout ratios being very low. I think of Japan. We think it’s very similar to the situation in the U.S. Payout ratios are at multi-decade lows, and when we think about what companies do and we talk to companies that we’re investing in and hear what they’re doing, coming out of the crisis it was balance sheet. It was let’s build. Let’s become more bulletproof.

CONSUELO MACK: Which they did.

ED PERKS: Even extremely good, healthy global companies were shocked at how much liquidity dried up for them in late 2008. There are, and the way I would kind of characterize it is, certain segments of the equity market that have very bond-like characteristics like utilities and telecomm services, very high dividend yields, and while in those areas we want to be very selective, there are still some really nice opportunities, but stepping outside that, being able to look at energy and materials and industrials, a much, much bigger opportunity today to buy attractive dividend yields.  They may not be the highest yielding names today, but we really like the trajectory that that dividend’s on.


CONSUELO MACK: So where are you finding the opportunities, and again, is that fair to say you’re deep value investors?

CHUCK DE LARDEMELLE: We’re more into the Buffett type of value, trying to find high-quality companies at a reasonable price.  We do devalue from time to time. The obvious place is Japan, although we’ve tried and we continue to try to really focus on companies that are better quality in Japan so you don’t end up with value traps. In terms of opportunities…

CONSUELO MACK: You feel that Japan, the equity market, is an opportunity.

CHUCK DE LARDEMELLE: Yes, by and large, and so is Europe. Now, in Europe, the difficulty is that the quality companies in Europe tend to be fairly to very expensive. In fact, I could argue that the quality in Europe today is more expensive than quality U.S.

CONSUELO MACK: So can you give me an example of a company that, for instance, that is high quality that you have looked at, and you said price-wise it just doesn’t work for us.

CHUCK DE LARDEMELLE: Sure. Let’s take a U.S. company called Expeditors, for instance, which we own. A well-known competitor in Europe is called Kuehne + Nagel which is listed in Switzerland. Kuehne + Nagel for decades traded as much lower valuations than Expeditors. They are two extremely well managed companies, and today Kuehne + Nagel trades at a substantial premium to Expeditors. It’s a way for European investors to get exposure to the global economy. It’s a freight forwarder, so they make a commission per container that they move around the world, and so all these stocks that are listed in Europe but do business outside of Europe. Inditex in Spain, for instance, benchmark has been terrible over the last few years, but Inditex is reaching new highs. So all the quality stocks that do business globally in Europe have been bid up, and you end up with a lot of cheap yet unsafe stocks, and that’s not for us either, so that means the stock became …

CONSUELO MACK: And what makes a stock unsafe?

CHUCK DE LARDEMELLE: Balance sheet being too stretched.

CONSUELO MACK: All right. So I know that each of you has some contrarian streaks in you as well, so what’s the most contrarian investments that you’re making now? Where are you going against the herd?

ED PERKS: Wow, that’s a good question. You know, in some aspect I think the way the markets have progressed the last year or year and a half, it’s gotten a little bit tougher to be a contrarian and to find contrarian opportunities. I mean, one sector in the U.S. that I think we’re spending a lot more time in is technology, where we haven’t been significant investors in the past.

CONSUELO MACK: Because they haven’t been income sources. Right?

ED PERKS: A combination, yeah, of them not being real income driven. That’s changing, and you can look at some of the larger cap names, and we do own Intel. That’s one that we think, you know, at this level the valuation is somewhat compelling, and I think a contrarian view while, yes, there is much slower growth in the PC and notebook area, the company does have I think improving prospects in other areas that are faster growing, and it still has a very entrenched leadership position in semiconductor manufacturing. So I think there are some areas where you can be a little bit more contrarian. Also, just in the nature of letting the portfolio shift the way we have and being a little bit more willing to part with some of the bond positions that have performed well for us the last several years.


CONSUELO MACK:  Contrarian at IVA, where are you the most contrarian now?

CHUCK DE LARDEMELLE: I think the contrarian bet is refusing to take the bait and sitting in cash…

CONSUELO MACK: Which you’re doing.

CHUCK DE LARDEMELLE: Which we’re doing in a big way. Obviously our exposure to Japan is very contrarian. We have about 15% of our portfolio, or 10%  in the Worldwide and 20 in the international in Japan. That’s been very contrarian, and then…

CONSUELO MACK: Actually you’ve done well in that at least in the last year or six months.  Right?

CHUCK DE LARDEMELLE: Correct, yes, yes. You know, trying to find conservatively managed companies with strong balance sheets as well. And then gold, I’m not sure if it’s contrarian or not, but we get a lot of comments, a lot of questions about the bullion; the fact that we own the bullion and not the miners, for instance. We believe that gold is a good hedge against the folly of central banking and that gold is far from being in a bubble. We try to value gold against other financial assets. So if gold is a currency which is the way we look at it, then you look at how many ounces of gold are necessary to buy the Dow Jones, for instance, and since the Dow was created, you need an average of 10 ounces of gold to buy the Dow, so Dow 14,000 you need gold at 1,400 an ounce. Gold is 1,680 today, so a bit expensive vis-à-vis that ratio, but the bubble in January of 1980 was one to one, 850 gold, 850 Dow.


There’s another perhaps even more fundamental view of gold versus paper money. It’s looking at the balance sheet of the Federal Reserve. The Federal Reserve owns a lot of gold that they mark at $42.22 an ounce, and if you mark that up to, say, 1,700- close to the current price- and we all went to the Fed to redeem our paper dollars, the dollars that you and I have in our pockets, the Fed would be able to pay us back about 40% in gold, and then the rest would get Treasuries and mortgage-backed securities. Well, how does that compare versus history?  During the gold standard, you needed 60 to 80% backing of gold. If you went below 45%, you had a run on your central bank, and also during the bubble in January of 1980, you were actually 140% backed by gold. So we’re still very far from bubble territory. We believe in gold, and we think it’s a fairly priced hedge today.


CONSUELO MACK: I’m going to have to end it with the One Investment for a long-term diversified portfolio. So what would it be? What would you have all of us own some of, Ed?

ED PERKS: Well, for me, as you’d probably suspect, it’s large cap, dividend-oriented stocks and that’s what we’re doing in Franklin Income Fund. That’s my largest investment. If you look at our top five holdings, really playing on that theme of sector diversification- Merck, Wells Fargo, GE, Duke Energy and BP- are our top five holdings.

CONSUELO MACK: All right, four U.S. and…

ED PERKS: Five different sectors, on average about a four percent dividend yield, substantially higher than long-term Treasuries, higher than you can get in corporate bonds and investment grade, and I’d encourage people to really broaden that, not just look at those highest yielding stocks. Really think more broadly about the dividend yield opportunity in equities and focus on that dividend growth potential.

CONSUELO MACK: All right, One Investment from your perspective at IVA?

CHUCK DE LARDEMELLE: For the long term, we like high-quality U.S. stocks. An example of that would be Berkshire Hathaway which doesn’t pay a dividend just yet, but we do believe that when Buffett decides to retire, he has very strong incentives to pay dividends, first because he is making donations of his shares to foundations and endowments, and these institutions will need the income, and so we believe that he will have a great incentive to pay dividends, and also because the main challenge when Buffett retires will be obviously capital allocation, and if you distribute a large portion of your earnings, then that challenge shrinks substantially, and so we still believe that the company is somewhat undervalued. We have an intrinsic value around 175,000 a share versus a price of 145,000, and it’s going to be a very nice compounder. If inflation ever comes back, you are much better off with equities than you would be long-term bonds at these prices.

CONSUELO MACK: So kind of over his dead body, though, with Warren Buffett paying a dividend, but you’ve given him some compelling reasons to change the habit of a lifetime.


ED PERKS: I think he loves to buy dividend-paying stocks. Right? If you look at his portfolio, it’s plenty…

CHUCK DE LARDEMELLE: We do pay attention to that, yes, especially in Japan. We like to see companies paying attention to shareholders and, therefore, returning some of the cash to shareholders through dividends.

CONSUELO MACK: All right, well, thank you both so much. I’m so delighted that you’re joining us for the first time on WEALTHTRACK and look forward to having you both back. So Ed Perks from Franklin Income Fund, thanks very much for being here.

ED PERKS: Thank you. It was great.

CONSUELO MACK: And Chuck de Lardemelle from IVA Worldwide and International Funds, thanks for being here as well.



CONSUELO MACK: 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 picks up on our guests’ emphasis on dividends. In an uncertain world, cash in hand and secure streams of dividends in the future are worth a lot. So our Action Point is: consider putting some money into high quality companies with long histories of paying and increasing dividends.


One of the simplest strategies is buying a low cost ETF. One of Morningstar’s favorites is the Vanguard Dividend Appreciation ETF with a miniscule .13% fee. As Morningstar puts it, the ETF “focuses on quality dividends, demanding that companies increase them for 10 consecutive years just to make the cut.” The emphasis on quality means a lower yield than some, but safe income.


Next week we are going to talk to another newcomer on WEALTHTRACK. Great Investor Mark Yockey, a past winner of Morningstar’s coveted International Stock-Fund Manager of the Year Award will share his perspective and strategy for his Artisan International Fund. If you have missed any of our past Great Investor or Financial Thought Leader guests you can find them on our website, 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 productive one.

Bill Miller: Where is he investing now?

February 8, 2013

A TV exclusive with legendary value investor Bill Miller. The only mutual fund manager to beat the S&P 500 for 15 years in a row, Miller’s Legg Mason Capital Management Opportunity Fund was the number one mutual fund last year. Where is he investing now? Find out! Continue Reading »

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