Archive for July, 2015


July 3, 2015

How hard has it been to be an active mutual fund manager, during a six year bull market, when you and most other active fund managers have underperformed passive index funds? That’s the question we put to Wintergreen Fund’s David Winters.

Watch the related WEALTHTRACK episode.


July 3, 2015

CONSUELO MACK: This week on WEALTHTRACK, are index funds raging out of control? Are these passive, low-cost funds actually a threat to retirement savings? Wintergreen Fund’s noted value investor David Winters sounds the alarm next on Consuelo Mack WEALTHTRACK.

Hello and welcome to this edition of WEALTHTRACK, I’m Consuelo Mack. As we celebrate our tenth anniversary year on WEALTHTRACK we have been taking an in depth look at one of the biggest investment trends for the past decade, the huge migration of both institutional and individual investors from actively managed funds to passive, index- based ones, especially ETFs. As we have reported before, index funds now account for a third of fund assets up from 14% ten years ago.

And recently, Exchange Traded Funds, or ETFs, have seen the lion’s share of the fund flows. As Morningstar has reported, U.S. ETFs have more than two trillion dollars in assets compared to nearly 13 trillion for mutual funds. That means 14% of funds assets are now in ETFs up from a mere 4% ten years ago.

During the current six year bull market index funds have outperformed the vast majority of actively managed funds. In addition the cost benefits of index funds are considered to be overwhelmingly in investors favor, especially when compounded over time.

The asset-weighted expense ratio for passive funds was just 2/10 of a percent in 2014, compared with 8/10 of a percent for active funds. Even investors in active funds are opting for lower cost ones. During the past decade the lowest cost quintile of active funds received $1.07 trillion of the total $1.13 trillion of the net new flows into all actively managed funds. With better performance and lower costs it’s hard to find anyone critical of these developments, but we have one with us today. Not surprisingly he is an active fund manager.

He is David Winters, Chief Executive Officer of Wintergreen Advisers and Portfolio Manager of the Wintergreen Fund which he launched in 2005. Winters was nominated for Morningstar’s International-Stock Fund Manager of the year award in 2010 and 2011. He has been a WEALTHTRACK regular since the beginning because his traditional value –oriented, global approach worked for years. But the last five years have been rough with the fund underperforming its benchmark and Morningstar World Stock category.

I began the interview by asking Winters why he thinks the move to index funds is a dangerous market mania.

DAVID WINTERS: Well, the idea of index funds, Consuelo, is fine, but what’s happened is it’s become this universal truth, and people have poured more and more and more money into index funds and because the way it works is they’re capitalization weighted.

CONSUELO MACK: Why is market capitalization a problem?

DAVID WINTERS: Well, because the more that something goes up, the more you have to buy, and so the stocks that do the best or that are most favored by the market, the index funds buy more and more of, and the companies that are not in favor, for example the companies that are not what we call the bubble tech, biotech stocks, get sold. It’s just the mechanics of it. It’s a computer program.

CONSUELO MACK: So from a value investor perspective as you are at Wintergreen, what are you seeing then? That the most expensive stocks are the ones that are getting the most owned in let’s say an S&P 500 index fund.

DAVID WINTERS: Well, what’s happened in the study that we’ve done, it shows that unless you own the most popular, most expensive securities, you can’t outperform, and so what that does is it feeds into this idea that the index funds are promoting in their marketing that they are inherently superior, but what they’re doing is they’re getting the public, in our opinion, to buy ever more expensive securities and neglect what’s undervalued. Investing is the only business, Consuelo, where people want to buy what’s going up as opposed to get a good deal. Value investing is getting a good deal.

CONSUELO MACK: So another problem that’s less obvious about indexation that you have highlighted, and we have a report that we will link to on our website,, is that the concentration of shareholder power in the big index firms, the Vanguards, the BlackRocks and the State Street, I think you said that they hold 16 percent of the shares outstanding of the top 25 companies in the S&P 500. Why is that a problem?

DAVID WINTERS: Well, what it’s done is it’s ended up giving enormous power to a very few number of firms, and so they get to determine, and the voting record is they basically had been voting 90 percent give or take in favor of every pay package. The great managers should get paid, but most of them shouldn’t get paid astronomical fees, and so what you end up losing is this dynamic of the shift of power that it’s in too few people’s hands and, in our opinion, they aren’t using that power to rein in the excesses of what’s going on in these big companies.

CONSUELO MACK: But hasn’t that always been the case? I mean haven’t big institutional investors traditionally voted overwhelmingly for management anyhow? Right? And I don’t know what Wintergreen’s record is of all of the stocks that you hold. I mean you have a focused portfolio, but I don’t know what percentage that you have in voting for management either.

DAVID WINTERS: Well, we’ve tried to find companies that are not excessive in their behavior and …

CONSUELO MACK: So you’ve been choosing them.

DAVID WINTERS: Occasionally we’ve gotten unfortunately surprised like by Coca-Cola last year where they wanted to vote themselves this massive pay package when they weren’t doing well, and so we brought it to people’s attention, and ultimately there were many shareholders who agreed, and the package was withdrawn.

CONSUELO MACK: And why is executive compensation and excessive executive compensation … and that depends on whose point of view you have … why is that a huge problem for you at Wintergreen? Why do you think it’s something that we really need to pay attention to?

DAVID WINTERS: Well, there’s two elements. It’s not only the fee that people are paying for investment managers, and you could say that index funds are low fee, but we argue that they’re actually very high cost because they’ve been rubber-stampers for these massive pay packages, and if you give somewhere between two and four percent of the value of a company away every year as a gift to your buddies or your cronies as the way it looks, what you’re really doing is in 10 years or so the ultimate shareholder has much less and, from a societal perspective, a group of few people have a lot of money, and the American public basically gets left holding the bag.

CONSUELO MACK: Let me go back to the concept of the popularity of index funds being a market mania, and you say it’s akin to something like the nifty fifty, to the tech bubble. Why do you view it that way? Why do you think it’s so dangerous?

DAVID WINTERS: Well, what’s happened, Consuelo, is that the money flows have increasingly gone into the index, and people have been told that the index is it, and again it’s a self-fulfilling prophecy, and it’s a very narrow group of securities that are going up, and increasingly we can tell from the numbers that are reported from the New York Stock Exchange that people are borrowing money, and considering you can tell what people are doing with the money, they’re either borrowing on their mutual funds or on ETFs, and so you’ve got this small group of companies that are very, very richly valued, and if history is a guide sooner or later they pop.

CONSUELO MACK: And so that’s what you think we’re seeing. We’re seeing this funneling into a narrower and narrower group of stocks, and I’m just looking because you call it an illusion of safety and lack of diversification that really worries you, and that Apple, Microsoft, Facebook and Intel for instance comprise 20 percent of the total return of the S&P 500 in 2014, and you think that is a big problem.

DAVID WINTERS: Well, because these are companies that everybody loves and everybody owns, and they believe that they’re going to grow at rapid rates forever. That’s not possible. First of all, they’re big. Secondly, they’re very short-cycle companies. We think a company like Apple, you know, has great products, but it’s an undifferentiated commodity with a six- month life, and everybody’s in love. Anytime, anybody. It’s a crowded trade. Everybody’s in on this. Everybody’s buying it. Everybody believes it. There’s nobody on the other side. There are very few people left doing fundamental value analysis, and so we can find fabulous bargains, and when I’ve seen this before in 2000 and when I’ve read the history of the nifty fifty when I was a kid, it ends in tears.

CONSUELO MACK: But you know, there are great companies, and that’s what you look for as well. Apple has been a great investment, and it’s kind of revolutionized the way that we use technology and revolutionized social media. And is it just that you think now it’s really overvalued?

DAVID WINTERS: Look. I don’t know whether it’s going to double or triple from here, but everybody owns the stock. Everybody believes it’s going to grow at 30 percent every quarter. It’s not possible.

CONSUELO MACK: And this is one of the reasons that you think that for retirees in particular, for retirement portfolios that this index mania, as you call it, is so dangerous. Right?

DAVID WINTERS: Absolutely because you have people who can’t really afford to lose their money are all talking about this and doing it, and it becomes a self-fulfilling prophecy as all the cash goes in. It’s market weighted, and we think again index funds are fine in moderation, but this has become extreme, and you have the other side where you have securities that trade at big discounts that are neglected now because the public and institutions are all doing the same thing at one time. I think it’s a bubble. It’s to the point we think of being irresponsible.

CONSUELO MACK: So of course this creates opportunities for you as a value investor; the fact that the crowd is going in this small group of stocks, and there you’ve got the rest of the world to invest in. So tell us about some of the opportunities that you’re finding that are counter to this kind of a trend that we’re seeing in indexation.

DAVID WINTERS: Well, here in the U.S. we like CSX. It’s a railroad in the southeast. The company is doing better. The management’s doing better. They’ve been tapped on the shoulder at least once, maybe twice by Canadian Pacific. So it’s a special situation. They run the company better. The stock goes up, or they get taken over, and we hope they just run the company better and they do a good job, and it’s a good company. People aren’t interested in CSX. It’s boring. You know? It’s a railroad. So you know we think that by being one of the only ones left who reads annual reports, visits companies, studies assets, that it’s an advantage because when this whole thing begins to unwind, we believe people should be putting at least some of their money in under valuations, not just chasing tomorrow’s dreams.

CONSUELO MACK: If you look at how index funds have done and specifically the S&P 500 index funds, again, which are the largest ones, that over the last six years they have vastly outperformed most active managers, and they certainly have outperformed … I think the S&P 500’s annualized returns over the last five years were something like 14 percent, and Wintergreen’s were like six and a half percent, so a huge outperformance. Why has the gap been so large between Wintergreen and the S&P 500 for instance, David?

DAVID WINTERS: Well, we don’t Apple Computer. We don’t own Intel. We don’t own any of the bubble stocks. We would never even in retrospect have bought them because they always looked expensive to us, and then also people have focused only on U.S. companies, and there’s a whole world out there, and so this has been we think mostly just sentiment driven. You’ve had index funds that have become massive marketers, and they’ve convinced people that these are low fee, which they are, but they’re high cost, and there’s huge concentration in a few number of what we think are very expensive, very dangerous securities, and so it’s our money and our friends’ money, and we’re going to do what we believe is responsible. In 2000 this sort of bubble went on, and everybody was doing it.

CONSUELO MACK: So this feels like that. Right?

DAVID WINTERS: Well, this feels worse because then you didn’t have index funds who were taking all the money and basically buying a small group of securities on a daily basis and pumping the whole thing up and selling off everything else. Then it was just euphoria. This is an institutional bubble that’s become almost a societal bubble that we think is very dangerous, and at some point, for us at Wintergreen the bigger the bubble has gotten, the more hard it is for us to keep up because we own stocks that trade at you know, six times, seven times, eight times earnings that are boring. People want excitement. It’s part of the whole phenomenon.

CONSUELO MACK: Oh, psychology of the markets, and when you’re talking about this, the mania aspects, this is exactly the kind of conversation that we would have had in the late 1990s when basically people capitulated and just said, “You know what? I don’t understand it. I just got to go this way because that’s where everybody’s making money.” So you think it’s going to end badly.

DAVID WINTERS: Well I think, well, except for us, Wintergreen and a few others, everybody’s capitulated. They all believe that indexation and buying the most expensive securities is the only thing to do, and we believe that at some point the whole thing will reverse.

CONSUELO MACK: We’ve been talking about ETFs and indexed funds on WEALTHTRACK over the last 10 years as a matter of fact, and one of the arguments that’s made is that it’s very difficult to pick an active manager that’s going to consistently over long periods of time beat the market because investment styles go in and out. You might have a decade where value is in. You might have a decade where growth is in. What about that argument, that in fact for the average person they’re better off investing in the stock market which does go up over time?

DAVID WINTERS: The problem for most investors is they buy when it’s high and then they panic, and it never works. There are good investors out there. There have been many good investors on your show over the years that if people had been willing to say, “I understand what they do. I believe them,” and they ride it out … nobody always outperforms, and this idea that you can jump from value to hyper-growth to doing LBOs doesn’t work. What does work and all the people I know who are really wealthy in the world did it by investing in a business or in a series of securities and sticking with it.

CONSUELO MACK: And the kinds of companies that you look for, if I looked at a snapshot of the Wintergreen Fund for instance … and let me just find them in my notes … is that I know that you’ve got 16 percent in cash right now, 37 percent in U.S. stocks, 47 percent in non U.S. stocks. How defensive is the Wintergreen Fund right now with that 16 or 17 percent in cash?

DAVID WINTERS: We’re a buyer and the cash is probably a little lower today. We find that there’s a lot to do because there’s a lot of undervalued securities. We’re bargain shoppers, and today what’s so different is you can buy A quality companies cheaply. It used to be you had to be what my business partner, Liz Coenaur, calls the dented soup can approach where you had to kind of …

CONSUELO MACK: Kind of damaged goods.

DAVID WINTERS: Yeah, it was C quality stuff cheap. Now we can buy A quality because everybody’s in the index fund mania.

CONSUELO MACK: Because that’s so interesting. So many other people are talking about how over valued the entire market is. So the indexes are over-valued, but underneath as you were saying there are many, many companies that are under-valued, and also 47 percent non U.S.. You’re finding more opportunities overseas?

DAVID WINTERS: People have forgotten that there’s a world sort of beyond the Atlantic and Pacific, and a lot of the growth even despite things may be slowing down, a lot of the opportunities are beyond the U.S., and so we’ve stuck to our knitting. Going back to that question of finding a mutual fund manager who will do a good job which we do the best we can, and we think there’s a lot to do overseas. The other thing about it, I would say, is sometimes underperforming is a good thing.


DAVID WINTERS: Because you’re not participating in the silliness that everybody else is doing. You’ve left the party. You’ve decided you’re not going to participate in that, and so it’s about discipline. It’s about hard work.

CONSUELO MACK: Let me ask you about the cost equation. We had Burton Malkiel on recently who was the author of “A Random Walk Down Wall Street”, very well-known financial thought leader in the industry, and one of the things that he told us is there’s one certainty in investing, and the certainly is that the more the money manager takes, the less the investor has. So the cost advantage of index funds is profound. In the Wintergreen Fund … I’ve asked you about this before … it’s 1.89 percent annual fee, and out of six and a half percent that’s a third of my return investing in the Wintergreen Fund goes to you. How do you answer that cost issue, and why are your fees so expensive? According to Morningstar, your fees are high.

DAVID WINTERS: Well, we also have an institutional class where the fees are lower, so you can do that.

CONSUELO MACK: Right, but they’re still 1.6 percent or something, but it’s still high by Morningstar standards.

DAVID WINTERS: Well, basically everybody’s gone to indexation. We’re one of the only ones in the world who’s doing any fundamental research anymore, and there have been periods of time where we have outperformed.

CONSUELO MACK: Oh, absolutely.

DAVID WINTERS: And there are periods of time where people are doing things that we think are ridiculous like now where we’re doing the right thing in our opinion, and I think if you look at what’s happened, and you made the point before about institutional investors, Wintergreen stood up in Coca-Cola. We read the proxy. We saw that there was a problem. We didn’t see any index funds get up and say, “Don’t do this.”

CONSUELO MACK: Right, except State Street did end up voting with you against the compensation package.

DAVID WINTERS: Yes, and we appreciated and acknowledge State Street for doing that, and we respect them, but we brought the issue up. State Street didn’t, and we’re willing to do things. We’ve helped reorganize Consolidated-Tomoka, and today it’s a much better company than it was. So we do things that others don’t, and I think most mutual funds, most investors fundamentally have become closet indexers.

CONSUELO MACK: And what should individual investors do? I mean should they be more proactive do you think in the … for instance, what do we do if we hold index funds?

DAVID WINTERS: Well, again it’s my personal opinion and I’m biased, but I think you shouldn’t have all your money in an index fund. Some of it is fine, but you’ve had this boom. No boom lasts forever. Everybody seems to have forgotten the mortgage crisis. It wasn’t that long ago. It’s the same sort of thing.

CONSUELO MACK: Housing prices will never go down. Right.

DAVID WINTERS: Never go down. Put more leverage on houses. You’ll just do phenomenal. It didn’t work. People got crushed, and so if it were me I’d be taking money out of index funds, and I’d be putting it in the people who … and there are a number of really wonderful people on Wall Street. I mean I think it’s a great business. I think there are a lot of ethical, high-quality people, and you many of them. They’ve been on the show, and you can choose a handful of people and you leave the money. Don’t look at it every five minutes. Great wealth is created over time.

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

DAVID WINTERS: Oh, you know, that’s so hard because the one that I have on my mind I don’t think that it would be so easy for people to own, but I’ll mention it anyway. We own shares in a company called Sun Hung Kai Properties which is in Hong Kong.


DAVID WINTERS: And why they’re so interesting is it’s some of the best property in Hong Kong, but they also have diversified into Shanghai. They’re a huge land bank, and everything they’ve built is on the mass transit railroad system. So they can get people in and out, and they’re very humble. The disclosure is excellent, and their long-term record is great, and you can buy it at 35 or 40 percent discount.

CONSUELO MACK: To what you think their intrinsic value is.

DAVID WINTERS: Yeah, and so intrinsic value is growing. You get a big discount. You have quality management. It’s the Wintergreen trifecta, and this is why we just went and saw all their properties. People aren’t doing this work anymore, Consuelo. So we think we earn the fee to go do the work, protect the shareholders and figure out interesting companies that have the ability to outperform over time.

CONSUELO MACK: And this is the time as well to have what’s called an active share. If were to look at you at Wintergreen, your portfolio, an active share portfolio, is one that deviates widely from the index, and you active share is probably off the charts in that you’re going to look at the Wintergreen portfolio, and there’s no index that matches the Wintergreen portfolio.

DAVID WINTERS: You know, we’re investors. It’s our own money, and there was a study recently done about patient capital, and if you basically are a long-term investor and you have a long-term timeframe, you can do great, but this whole idea that you can trade in and out, and that you’re going to follow this bubble and jump off that bubble and get on the next doesn’t work. What works is doing the work. Understanding what you’re owning. Buying good businesses run by honest people, and buy them cheaply.

CONSUELO MACK: And you just have to understand that there are going to be periods of underperformance from indexes, especially in a big bull run like we’ve had for the last six years.

DAVID WINTERS: Which is a warning sign, and unfortunately what happens is people get sucked in that this is going to go on forever. The trees are going to grow to the sky. Sooner or later somebody comes along with a chain saw!

CONSUELO MACK: We’ll leave it there. David Winters from the Wintergreen Fund, thank you so much for joining us on WEALTHTRACK.

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 picks up on research we discussed with David Winters. It is: Look for independent minded managers who think like owners.

Some recent academic studies show that what’s called “patient capital” outperforms the market and the competition over time. Managers who have high active share portfolios, that means their holdings are very different from their benchmark, and who trade infrequently, in other words stay in companies for several years, outperform their benchmark on average by more than 2% a year net of costs.

The patient capital approach is a characteristic of most great investors.

Next week we are going to talk to an outspoken contrarian who has successfully bucked conventional wisdom for the last decade at least. Treasury bond manager Robert Kessler will speak his mind and take on Wall Street. He is always worth listening to.

To see this program again and other WEALTHTRACK interviews please go to our website on Also feel free to reach out to us on Facebook and Twitter.

Thank you for watching. Have a great Fourth of July weekend and make the week ahead a profitable and a productive one.


July 3, 2015

As investors’ move in droves to passive, low cost index funds, one veteran money manager is sounding the alarm. Wintergreen Fund’s David Winters says index funds are a dangerous market mania, akin to other market bubbles. Continue Reading »


July 3, 2015

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