YOCKEY: BULLISH GREAT INVESTOR TRANSCRIPT

BULLISH GREAT INVESTOR The bull market turned six years old earlier this month. How much of a concern is the market’s age and it’s more than 200% advance? In a rare interview, Artisan International and Global Funds’ Great Investor, Mark Yockey explains why he is still finding plenty of opportunities in the market and why the rising dollar is a financial game changer for many companies.

Mark Yockey Portfolio Manager Artisan International and Artisan Global Equity Funds

CONSUELO MACK: This week on WEALTHTRACK, a rare interview with a great global investor who looks to Winston Churchill for inspiration. Where is Artisan International Fund’s Mark Yockey taking a stand against the crowd now? Award winning and market beating Mark Yockey is next on Consuelo Mack WEALTHTRACK.

Hello and welcome to this edition of WEALTHTRACK, I’m Consuelo Mack. We all know the bull market turned six years old earlier this year and despite endless warnings of its imminent demise along the way it continued to climb that proverbial wall of worry. We’ve come a long way.

The excellent research team at Strategas Research Partners shared some figures that illustrate just how far. We all know that the S&P 500 has tripled since it hit its bottom of 676.53 in March of 2009. But what does that mean in actual dollar terms?

The market capitalization of the S&P 500, the value of its stocks has gone from $5.9 trillion to over $18 trillion. The average price of a stock has risen from about $24 to $85 dollars a share. Those share prices reflect much higher profitability. Operating earnings per share have more than doubled from $49.51 to nearly $113.

The obvious downside to this wealth expansion is that the market has gotten much more expensive. At the 2009 bottom the S&P’s price/earnings multiple on trailing 12 month earnings was just under 14. The P/E is now around 18 times.

And the dividend yield on the S&P which was close to 4% six years ago has fallen to around 2%. What about longevity?

As you can see from this chart, Strategas plotted the magnitude and duration of bull markets since 1928. Though not the longest or strongest this one is getting a bit long in the tooth and has generated impressive returns.

How much of a concern is the market’s age and size of its advance?

This week we have a rare interview with great investor Mark Yockey, Portfolio Manager of the Global Equity Team at Artisan Partners. Yockey is known for his patient, contrarian approach and outstanding long term performance. Among his responsibilities he oversees the flagship Artisan International Fund which he launched in 1995 and for which he was named Morningstar’s International Stock Fund Manager of the Year in 1998 and a finalist in 2012. Yockey also runs the highly regarded Artisan International Small Cap fund, launched in 2001, and the younger Artisan Global Equity Fund started in 2010, which has earned a five star rating from Morningstar. The most recent addition to his mutual fund portfolio is the Artisan Global Small Cap Fund started in 2013.

I began the interview by asking Yockey how concerned he is about the U.S. market’s big, lengthy advance.

MARK YOCKEY: Consuelo, I’m not that concerned about the prices in the United States for stocks. There’s a lot of positives we see for the U.S. economy. The corporations in America are more profitable than they ever have been. They’re generating extremely high levels of cash. They’re using the cash to buy back stock and to pay higher dividends. You just saw this week that all the banks are increasing their payout ratios for example. It’s not a day that doesn’t go by that someone doesn’t seemingly announce a $15 billion share repurchase. So corporations are profitable. Inflation’s low. Interest rates are at zero. We haven’t seen that in the history of mankind. In fact, in some places they’ll pay you to put your money there rather than you get paid.

CONSUELO MACK: Right, the negative rates.

MARK YOCKEY: Negative rates. So I know prices have gone up, but they still seem to us to be in the reasonable range.

CONSUELO MACK: And you’re a global investor. You had told me at one point that you thought that looking around the world in fact that equities are a good place to be. Why?

MARK YOCKEY: Well, because the U.S. has outperformed the rest of the world for the last five years, and so prices relative to the U.S. stock market are significantly cheaper. So P/Es in Europe, for example, are two and three and sometimes four multiple points lower for the same industry and the same in Asia. So we’re finding lots of attractive companies in Europe and Asia.

CONSUELO MACK: You have called the U.S. market kind of coming out of the financial crisis and over the last several years a no-brainer. How would you describe the U.S. market today?

MARK YOCKEY: I think it’s really attractive. I think …

CONSUELO MACK: Not a no-brainer anymore but …

MARK YOCKEY: It’s not a no-brainer, but there’s lots of attractive companies out there. We find some of these stocks that we own now we think are just incredibly attractive.

CONSUELO MACK: Give me an example.

MARK YOCKEY: Oh, J.P. Morgan is a no-brainer. The stock is 60 bucks a share. They just increased their payout. They generate $20 billion a year in cash. They’re coming out of all these penalties and fixing all the things that maybe they wish they had done a little bit differently in the past, and the stock is trading… Now it’s what? It’s trading at $60 a share. We think the stock is worth 80 or 90 a share. That’s just one example.

CONSUELO MACK: Let me ask you about the banking industry because it’s changed in the U.S. because of regulations and obviously regulations all over the world. It’s a different business now than it was pre financial crisis. Is it still an attractive business?

MARK YOCKEY: Yes, it is. It is.

CONSUELO MACK: And what’s attractive about the new banking industry?

MARK YOCKEY: Well, ironically we have the most advanced financial system in the world, but we have some of the strongest net interest margins in the world. So it’s attractive for a number of reasons. Interest rates are going to go up in the U.S. for more than in the rest of the world. The U.S. economy is leading the world out of this recession. So as rates go up, companies that have big deposits are going to get paid for their deposits. So companies like J.P….

CONSUELO MACK: Finally.

MARK YOCKEY: Finally, so J.P. Morgan, Bank of America, Wells Fargo. There’s four banks that control something like 45 percent of the deposits in the United States. They’re all going to make a ton of money based on just the fact that they have virtually half of the savings of America in their vault, and that’s going to be a big tailwind to earnings. And then everybody hates these guys. The regulators hate them. Their customers hate them. Investors hate them because they haven’t done anything and they’ve really underperformed, and we think these stocks are really attractive.

CONSUELO MACK: If you look at the rest of the globe, are there any other no-brainer markets out there like the U.S. was coming out of the financial crisis? Is there another no- brainer market?

MARK YOCKEY: Well, the problem with no-brainers is, if I could just caution my use of the word no-brainer, is sometimes no-brainers aren’t no-brainers, but we think no-brainers mean really, really attractive to us. So that’s where we put a lot of money. It doesn’t mean we’re always right. So we think that as close to a no-brainer as you’re going to get is the exporters out of Europe because you have this paradigm shift where the euro has gone from 140 to the dollar to a dollar. So all these companies have spent the last 20 years getting more competitive to compete with the U.S. because we had a weak currency. Now they have a weak currency, so they’ve become terribly efficient. So now they’re going to be in the same situation that our industrial companies were 10 years ago, and they’re really attractive and they’re going to grow much faster probably than a lot of the U.S. industrial guys are.

CONSUELO MACK: So the dollar is a game changer.

MARK YOCKEY: The dollar is a game changer. Yes, it is, and commodity prices are a game changer, and people don’t get it because for 10 years commodity prices, because of China and because of rapid world economic growth, commodity prices were on a rip, and so you saw the oil companies and metals companies and mining companies and trading companies. They all did great. Now we’re on the other side of that, and so that means all the companies that buy this stuff are going to benefit from it because it gets cheaper and cheaper. The price of steel is down 20 percent in the last two months because the Chinese aren’t using it at home. So what are they doing? They’re selling it anywhere they can sell it, and the price has gone down. So if you’re a car company if the price of steel goes down, that’s a good thing. Right? So all these companies, these exporters out of Europe have lower raw material costs. The price of labor is stable if not falling. They’ve outsourced a lot of their production to lower-cost countries, and the price of the currency has gone down by 30 percent. So their foreign profits are up by 30 percent.

CONSUELO MACK: Mark, how are you taking advantage of the rise in the dollar and the falling commodity prices in your Artisan funds?

MARK YOCKEY: So there’s a couple of ways that we’re looking at it, but the primary way we’re trying to benefit from this lower currency in Europe is that we’re looking at the exporters, and that is companies like BMW. It’s companies like Porsche. It’s companies like not in the auto industry but in the engineering industry, companies like Schneider, and these companies are all going to be huge beneficiaries of a weaker currency.

CONSUELO MACK: Are you early, or are you already seeing it?

MARK YOCKEY: We’re already seeing it. No, we’re not early, but we think this is a long- term trend. With these mega trends, you don’t have to be the first person to figure it out. You don’t want to be the last one either, but as long as you’re early on in the process, we think these stocks can all go up 30 and 40 percent from where they are today.

CONSUELO MACK: Is this something you think that we’re going to see for many more years?

MARK YOCKEY: I think so. I think the U.S. economy is going to outperform Europe for a long time, and so a stronger economy like we have in the U.S. typically leads to a stronger currency, and Europe still has a number of issues that people are well aware of because it’s in the press all the time, the Greeks and the Italians and the Spanish and the French. These guys, it’s like a big dysfunctional family, and they’re always yelling at each other and so it’s always in the newspapers. But at the end of the day it seems to work, and we think that this can last for three, four, five years.

CONSUELO MACK: You follow big trends but also are known as a stock picker, which you have a very successful track record at that as a matter of fact, reading from your literature that you look for well-managed businesses generating strong earnings and free cash flow growth at reasonable prices. What are the other things that you look for at Artisan that maybe other investment managers don’t?

MARK YOCKEY: I think what we do differently is we look for category killers. We want to have companies where there’s not very much competition and where you have to pay a lot to get what they have to sell because what happens is if you have these companies that are these category killers like a Baidu in China or like a Porsche in the luxury auto space, the margins are three and four times higher than the average company that’s in the commodity space. So I think that’s what makes us a little different.

CONSUELO MACK: Explain how Baidu fits into this category killer.

MARK YOCKEY: Well, so think of Baidu as the Google of China. So they dominate search, and China is much later to the smart phone than the United States market is, and only now in the last year or two have smart phones proliferated in China, and also you have to have a high- speed network for you to do a lot of transactions, to buy things, sell things, to get information off of your smart phone, and it’s only in the last two or three years that they’ve had the network behind the phones that allow you to move a lot of data around.

CONSUELO MACK: So Baidu is a major beneficiary of the smart phone phenomenon?

MARK YOCKEY: Huge. Huge beneficiary. So before when we first invested in them, everything was off the desktop just like Google was in the beginning, and then Google saw this trend in the United States five years ago, and they switched and they moved their platform onto the phone because they see how big the phone is going to be, and the phone is just beginning. People think we’ve all gotten saturated with it.

CONSUELO MACK: Saturated, but we’re not.

MARK YOCKEY: No. It’s going to be way bigger than it is now, and so in China Baidu, the transactions people are doing on their phones are growing at 100 percent a year, and so with that you get advertising just like you do on Google or Facebook or whatever, and the company is selling at 20 times earnings and is growing its sales at 40 percent. There’s not that many companies out there in the world that are growing at 40 that have a 20 P/E.

CONSUELO MACK: What about the China question, that China’s growth is slowing?

MARK YOCKEY: They still dominate search, and it’s the fastest growing e-commerce market in the world, and these guys dominate e-commerce along with Alibaba and Tencent, and we own some of each of those too. It’s a $12 trillion economy. It is slowing. The economy is slowing but that’s okay. It’s slowing from seven to five probably. The government says seven or eight. The number is probably four or five. That’s fine. If we were growing at four or five, the economy of the United States we’d explode.

CONSUELO MACK: We’d be thrilled.

MARK YOCKEY: We can’t grow that fast. China shouldn’t be growing at seven percent anyways. It’s a $12 trillion economy. The U.S. is an $18 trillion economy. The fact that it’s slowing down is finally they’re admitting reality, and that’s a good thing.

CONSUELO MACK: Google. You mentioned Google. That’s also a large holding of yours in the global fund. What is the story with Google which you also think is very cheap? Right?

MARK YOCKEY: Well, it’s a no- … I almost said a no-brainer. It’s really attractive. So they’re doing all the right things. They’re investing for the long term. They generate a ton of cash, and the mobile revolution is just beginning. People are worried about Facebook. People are worried about social networks. People are worried about all these things, and you have to worry about something. Otherwise it wouldn’t have a 16 P/E or 17, whatever it is. The fact of the matter is the company continues to grow at 15 to 20 percent a year. It throws off a ton of cash. It’s a global powerhouse, and we think it’s a great category killer.

CONSUELO MACK: What about all of the other things that Google is contemplating, the Google car? They’re going into all sorts of other areas.

MARK YOCKEY: Google car. The car. I didn’t mention it when I talked about Porsche and Volkswagen and Toyota, but the whole way cars are going to be used and consumed and driven and functioned and built is changing. So we’re looking for companies that benefit from that, and Google might be one of the companies that benefits from it because there will be self-driving cars in the next 10 or 15 years. I don’t think it’ll happen as fast as people say, but it’s going to happen, and if they’re the company that figures it out, they’re going to benefit from it. I don’t know if they will but it’s a placeholder.

CONSUELO MACK: So this plays into technology and innovation that artisan is looking for companies that are doing things that are new in technology and that are innovative. Google has a place clearly in that space. Right?

MARK YOCKEY: Yes, that’s right, and there’s another company. There’s a Dutch company that may be the most valuable company in the world. Here’s why. They make lithography equipment.

CONSUELO MACK: What is it?

MARK YOCKEY: They make lithography equipment. Think of lithography equipment as a camera that allows you to make chips, and everything in the world runs on chips. In a digital world you have to have chips. You have to have memory chips. You have to have brain chips. Everything has to have a chip, and you have to have ASML’s technology to make chips.

CONSUELO MACK: So that’s the name of the company, ASML.

MARK YOCKEY: ASML, yes.

CONSUELO MACK: And it’s based in Holland, or The Netherlands.

MARK YOCKEY: It’s based in some little town in Holland. There used to be three. It used to be Nikon, Olympus and ASML that competed, and then the Japanese dropped out because they couldn’t keep up. So now it’s the only company in the world that makes the equipment they make. The machines sell for $100 million a piece. They have new machines that are coming out in the next couple of years. They’re going to revolutionize what they’ve already revolutionized. The thing is it’s been a great stock, and we think it’s going to continue to be a great stock because there’s only one of them.

CONSUELO MACK: How do you find these companies?

MARK YOCKEY: Well, you read a lot.

CONSUELO MACK: Are you always adding to the list? How does it work at Artisan?

MARK YOCKEY: Well, we like to keep out investments as long as we can, as long as the company continues to grow and the valuation stays attractive. So companies like Nestlé we’ve owned for 15 years. Nestlé’s been a great investment for 100 years, and I don’t know if we’ll keep it for 100 years, but we have no intention of selling it. So we own companies like Budweiser. We’ve owned that for six years. We’ve owned companies like Linde in Germany for, I don’t know, eight or nine years. We love these category killers because you invest in these companies, and they just keep doing the right things because they’re run by people that know what they’re doing and a great business. If you have a great business and a great management, you’re probably going to make a lot of money.

CONSUELO MACK: But how do you identify an ASML for instance?

MARK YOCKEY: Well, we look for companies that don’t have very much competition. We look for companies that do something different, and ASML is a company that we came upon 10 or 12 years ago, and we owned it and it went up a lot. Then we sold it and it came down, but then we relooked at it. Relooked at it? We looked at it again, and it was just as good and, in actual fact, we never should have sold it, and so we bought it back and it’s gone, I don’t know, 40 percent in a year, but it’s still attractive because they have a new wave of technology that is totally innovative that’s doing stuff that’s like Captain America stuff, and we think it’s going to revolutionize their business.

CONSUELO MACK: You mentioned Alibaba that you own a little bit of.

MARK YOCKEY: Just a little. Not much.

CONSUELO MACK: Right. What’s your view of Alibaba?

MARK YOCKEY: We think they’re well positioned long term for e-commerce, but there are some issues. They just went public. Insiders are going to do a lot of selling. They’re changing how they monetize their business, and so we’re a little bit cautious on Alibaba. We like Baidu better.

CONSUELO MACK: Clearly it’s a much larger holding. Talking about some of your long- term holdings, you have been a big investor in cable companies which for most of us from outside the investment business think cable is boring, but Comcast is one of your largest holdings and Liberty Global in the International Fund is one of your largest holdings. What is it that’s attractive about cable companies and Comcast and Liberty Global in particular?

MARK YOCKEY: So to move the data, you have to have a pipe, and if you have a little pipe you move a little bit of data, and if you have a big pipe you move a lot of data, and cable has a big pipe. So it’s just think of a garden hose. Right? So cable is a big garden hose, and it’s cheaper to get your broadband through your cable than it is to get it through the telephone company.

CONSUELO MACK: So that’s the key.

MARK YOCKEY: That’s the key. It costs 10 times as much for Verizon or for T, telephone, to give you broadband than it does for the cable company. So what happens is these companies are cash flow machines, because once you build the network because there’s not very much investment that has to be made. So the profit margins tend to be very attractive, and in Europe it’s even better. Comcast is a good story but Liberty is even better because they European historically have gotten cable for almost nothing, and in a lot of countries there isn’t any cable, and so in countries like Germany broadband penetration is really low, and so as people rotate over to broadband to get higher speeds at home, it costs Liberty virtually nothing to upgrade their speeds. So their profit margins are just continuing to expand. Someday someone’s going to buy them out, and Malone who’s behind Liberty has a long history of making really good investments, and people come along and buying him out.

CONSUELO MACK: Is there a technology that could compete with cable in the foreseeable future or not?

MARK YOCKEY: Not really. The problem with satellite is you don’t have both ways with satellite. So you need a return path, and the most efficient is cable. It’s like a railroad. You never put a railroad track next to another railroad track. You can’t put another cable network in because it costs too much. So investing in Comcast or Liberty today, you’re benefiting from the investments that some poor guy made 10 or 15 years ago and may have lost his shirt. So Liberty just bought out virgin media in the U.K. which is the biggest cable company in the U.K., but the original investors in the U.K. 20 years ago, and I remember this with some … I still have a small scar in my back over this one. Those companies went bankrupt because it just costs a ton of money, but the fact is when the network is built, it just is a cash flow generator.

CONSUELO MACK: One last question for this interview and that is, if we had to own one investment for a long-term diversified portfolio, what would it be? What would you choose?

MARK YOCKEY: My no-brainer?

CONSUELO MACK: Yes, I guess.

MARK YOCKEY: So I think Baidu is going to be a homerun. It’s $200. We initially bought it at $60, and we thought it was too expensive at $60 which is why we didn’t buy it, because when we first looked at it, it was $20, but this is one of these stocks. It’s like McDonald’s in 1955 or Hilton hotels 30 years ago. It’s one of these things that’s just in its infancy, and we think they’re going to continue to grow at 40 percent a year for the next four or five years, and the company is going to double or triple in size.

CONSUELO MACK: All right. Baidu. We’ll see what happens. Mark Yockey, such a treat to have you here from Artisan International Fund and Artisan Global Equity Fund and a couple others as well. Thanks so much for joining us.

MARK YOCKEY: Thank you, Consuelo. Great to be here.

CONSUELO MACK: At the close of every WEALTHTRACK we try to give you one suggestion to help you build and protect your wealth over the long term. This week’s Action Point is a contrarian one based on a terrific wall street journal article provocatively titled “America, The Capital of Asian Art” by veteran reporter Kelly Crow. The Action Point is: take a close look at those old Chinese bowls and vases you inherited from your parents, grand-parents or other ancestors. They might be worth a great deal more than you realize. According to The Journal, art dealers are scouring the country for Chinese antiques to sell to Chinese buyers because there are so few authentic ones available in China itself. Fakes are rampant in China today and Mao’s reign of terror, especially during the Cultural Revolution, destroyed many Chinese antiquities.

During the 18th, 19th and 20th centuries many Chinese decorative objects and works of art were exported to America or brought here by collectors. Chinese antiques, with a proven American history, or provenance as they say in the trade are even fetching premium prices in some cases. How to get an appraisal of your family heirlooms? Major auction houses such as Sotheby’s, Christies and Doyle New York have Asian art experts. And there are professional appraisers all over the country certified by the Appraisers Association of America as well. We will have links to all of them on our website.

Next week, we are going to have an exclusive interview with contrarian bond and currency investor Stephen Smith of the Legg Mason Brandywine Global Opportunities Fund who has a history of delivering market beating returns from some faraway places.