Tip:
Highlight text to annotate it
X
WealthTrack #1008- 8/16/13 [music]
[music]
[music]
[music]
[music]
[music]
[music]
[music]
CONSUELO MACK: This week on WealthTrack, Morgan Stanley's asset allocation king David Darst
teams up with Mutual Global Discovery Fund's Peter Langerman to dig for hidden treasures
in world markets. Where are they finding buried bargains? Darst and Langerman on where the
global values are, next on Consuelo Mack WealthTrack. [music]
[music]
[music]
[music]
[music]
[music]
[music]
[music]
[music]
[music] SPONSOR: New York Life along with MainStays
family of mutual funds, offers investment and retirement solutions so you can help your
clients "Keep Good Going." [music]
[music]
[music]
SPONSOR: Additional funding provided by: Loomis-Sayles - investors seeking the exceptional
opportunities globally. The Wintergreen Fund - your home for global
value. ...and Rosiland P. Walter
[music]
[music]
[music]
[music]
[music]
[music]
[music]
[music]
[music]
[music]
[music]
Hello and welcome to this edition of WealthTrack, I'm Consuelo Mack. This has been a great time
to be a U.S. investor. Over the last couple of years American stock markets have outperformed
the gains in other developed markets, including Europe, and have trounced the losses experienced
in many emerging markets. Having a home bias has paid off, but will it continue to do so?
If history is any guide the answer is no!
According to a study of the performance of twelve different global asset classes over
the last decade by wealth management firm Gerstein Fisher, one year's winners are rarely
next year's victors. Last year's winning category, Global Real Estate Investment Trusts has dropped
out of the top three this year. Gold, the number one asset class in 2010 and 2011 is
near the bottom of the list so far this year. And the move into emerging markets, which
was so rewarding in seven out of the last ten years, is now lagging badly. Gerstein
Fisher's conclusion: It is nearly impossible to pick winning asset classes in advance and
in fact broad global diversification is the best long term strategy, it's beaten U.S.
only focused investing pretty consistently over the last 10 and 15 year periods. We will
have a copy of their research report on global investing on our website, wealthtrack.com.
Global investment trends and strategies are our focus on this week's WealthTrack with
two global investment pros. Peter Langerman is the Chairman, President and CEO of Franklin
Mutual Advisers where he oversees the value-oriented mutual series funds. He is co-portfolio manager
of several including Mutual Global Discovery and Mutual Shares. Financial Thought Leader
David Darst is a WealthTrack regular. He is Chief Investment Strategist of Morgan Stanley
Wealth Management with responsibility for asset allocation and investment strategy.
He is also the author of seven books including a wonderful primer on the art and science
of asset allocation titled, "The Little Book That Saves Your Assets". I began the interview
by asking Langerman, as a deep value investor, about his view of the U.S. stock market given
its strong multi-year performance.
PETER LANGERMAN: Things aren't as cheap as they were. On the other hand, my view is they're
not so out of control in terms of valuations and what's really happening at the company
level that we feel that the market is overvalued. There are always pockets in our view that
people are not looking at or worried about, and that's what we tend to focus on, and at
the same time there's some areas that have done very well, and where we had exposure
we've trimmed and we're avoiding. So there are things to do, and that's good for us as
bottoms up value investors.
CONSUELO MACK: Right. So David, at Morgan Stanley your view of the U.S. stock market,
given the run up that we've had in the last couple of years?
DAVID DARST: Well, it looks on a short-term basis to perhaps be a bit overbought right
now, Consuelo. Volatility is very low. Margin debt is very high. Trading volume has been
very low of late. That having been said, the four engines of this U.S. market and economic
aircraft are all firing very, very flawlessly. Monetary stimulus is still in place. Number
two, the housing market, new home sales, existing home sales, pending home sales, builders'
confidence. Number three, the consumer. Retail sales, consumer confidence, these numbers,
consumer borrowing. People have been willing to take on some debt to purchase things and,
finally, the production side, Philly Fed, the Empire State manufacturing, the Chicago
purchasing managers index. So a lot of these. You won't believe this, but the 55 reading
that just came out a couple of weeks ago on the ISM manufacturing. Anything above 50 means
expansion.
CONSUELO MACK: So looking at where you could invest in the globe, about half of Global
Discovery Fund or the Mutual Series Funds are in the U.S.? So you're still finding value
in the U.S. What kinds of situations are you looking at that are kind of emblematic of
what you're doing at Mutual Series?
PETER LANGERMAN: Sure. I mean, some of the things that we've looked recently are in the
underperforming areas such as energy, for example. Energy by and large has been an underperformer.
There are lots of reasons. Part of them is macro. Part of them is just the nature of
those businesses. They're very capital intensive by and large, and they haven't really participated
in this general market recovery. So there's some specific companies. Again, it's not let's
find an industry and invest in a bunch of different companies. It's much more company-specific,
but for example there's some E&P, exploration and production companies, that have kind of
left behind. There have been some names in the news where some large shareholders, activist
shareholders have taken the opportunity to say, "Wait a second. These are underperforming
companies that have lots of value, good asset value, but they haven't really demonstrated
that in terms of their stock price."
CONSUELO MACK: So Apache, for instance, one of your holdings.
PETER LANGERMAN: So a name like an Apache where we're active. We've owned it for a while.
We engage with management. They've actually taken some steps of late to announce sales
of assets, rationalization of their business, you know, doing things that we think are moving
in the right direction, albeit they have a ways to go, but to highlight the value. So
it's a stock that trades in the 80s that we think is worth well north of 100, and the
asset value really is there to demonstrate it, but they've got to show the world that
they can actually get there. Some of the med tech names is another areas. Now, those names
have done by and large pretty well, but a name like a Medtronic which we still think
trades too cheaply. People still have lots of issues with the nature of the business
and product liability issues. There's a medical tax issue, but you cut through all that. They've
got a CEO who really is focused on delivering value to shareholders, returning cash to shareholders,
being more thoughtful about acquisitions, so that's the kind of name that we look at,
and we still think there's lots of opportunity there for us.
CONSUELO MACK: So patience. I mean, how patient are you as a deep value investor?
PETER LANGERMAN: I think for value investors, there's a balance. I think most value investors
like ourselves want to make sure that you're right on the values. Right? If you're right
on the values and you're buying something at 60% of intrinsic value, you're willing
to wait.
CONSUELO MACK: You know, it's so interesting, because what his view as a professional versus
what usually the individual investor's view is, is very different. Individual investors
don't tend to be that patient. Right? And so I'm looking now at what's ... we've had
changes in different asset values, and we're seeing some very marked fund flows, David.
For instance, the last couple months there have been wholesaling selling of bond funds,
and individual investors have been moving into U.S. stock funds.
DAVID DARST: Many of your viewers, many of our generation okay, the baby boomers ... there
are 76 million of us born from 1946 to '64. We basically want our portfolios to have a
little bit more stability and give a little bit more predictability of income. So that
was the driver into the bonds. So I find it good. This is early innings for people for
this massive great rotation you've talked about on your show, we have a lot of cash
which is yielding you nothing. However, it's yielding you 22 percent if you didn't buy
Brazil. It's down 22% this year. So you basically have that as dry powder. The market has run
up a lot. Should it pull back in the U.S., in Japan, if it even gets further cheap in
Europe as Peter's been talking about, we would basically be adding to U.S. stocks, to Japanese
stocks, and then begin to nibble at European stocks. Emerging market ...
CONSUELO MACK: So this is incremental you're talking about. .
DAVID DARST: That's right. So we think it's early innings, this great rotation out of
bonds, but we would say to all your viewers be very careful. If bond interest rates rise
by one and a half percent from this level... right now a two-year bond yields only 30 basis
points, 0.30. A ten-year is 2.5 ...
CONSUELO MACK: These are the treasuries.
DAVID DARST: Ten-year treasury, 2.58, and a 30-year treasury is 3.58, right about 100
basis points more. If interest rates go up by one and a half percent, 150 basis points,
Consuelo, a two-year bond loses one percent. Okay? A 10-year bond ...
CONSUELO MACK: Principal.
DAVID DARST: In principal value. A 10-year bond loses 11 percent, and a 30-year bond
loses 25%. So we say to all your viewers be very careful. Analyze the maturity structure
of your portfolio, and be looking at short-duration bonds and/or floating rate notes whose capital
doesn't change because the coupon changes if interest rates do rise. We don't see rates
spiking upward, but we think they've gone down. Your viewers know they've gone down
for 32 years since 1981. Here we are in 2013. So you've had a long, long bold market in
bonds, so to me it's a wonderful thing that individuals are starting to shift from bonds
into stocks. There was a period earlier this year when they were moving from bonds into
cash, and so a year ago we had 30% in stocks. Today we're 42% in stocks for a moderate high
net worth investor. A year ago, we were 42% in bonds. Today we're 30% in bonds. Most of
the reduction has come in the mid and long maturity corporate and government bonds.
CONSUELO MACK: The problem is no one wants to be the last guy out of their bond fund
or whatever, so that's why it's such a temptation to make some pretty radical moves. You know,
you just talked about Europe. So Morgan Stanley starting to think about investing in Europe.
You are there, Peter, in the Mutual Series Fund, so tell us and you're there in a very
contrarian way. So tell us what your European strategy has been.
PETER LANGERMAN: Yeah, it's interesting that I think our initial view was that Europe would
not completely implode. It semi imploded but didn't completely go off the rails which was,
to some extent, a contrarian view. We had a lot of people talking about the breakup
of the euro, et cetera. It got bad, but it didn't get that bad. So we were there, but
actually what we've been focusing on more recently that I think still is a bit unusual
is companies that are euro-centric, that are not only headquartered and domiciled in Europe
but actually doing most of their business in Europe. There are certainly lots of companies
that are headquartered in whether it's the U.K. or Switzerland, but their business there
is minimal.
CONSUELO MACK: Forty percent emerging market. I mean, that's...
PETER LANGERMAN: Right, they're Europe in name, and that was a theme. They kind of got
tarnished with everybody else that was in Europe, but we've in a sense gone beyond that,
because there's some companies that actually do most of their business or a lot of their
business in Europe, and we're seeing some signs even from some of the major brokerage
houses saying, "Oh, you know what? Europe actually is showing a little bit of life here,"
and it was always recession, almost catastrophe. Now it's not great growth. Nobody's talking
about Europe being China. On the other hand, if they're just stabilized, that's a big victory,
and so there are these companies, Metro is an example of a company that's basically a
European-centered company headquartered in Germany but has lots of operations in Europe.
It's a consumer-based business going through a restructuring.
CONSUELO MACK: So what is it? Consumer electronics?
PETER LANGERMAN: It's in electronics. It's in hyper markets. It's in cash and carry,
a lot of those types of businesses. It's also going through a restructuring. We like that.
It's got a new CEO. So they're selling assets. They're restating their financials to make
it more understandable, being a bit more shareholder friendly, but it's also in the context of
an overall situation that is stabilizing and getting a little bit better. So I think, yeah,
we're not in the business of making these kinds of predictions about big picture macro
trends, but we are seeing from the ground up, talking to CEOs, talking to companies,
that by and large things are okay, not great, and there could be another bump in the road,
but they're not the disaster that most people were anticipating was going to happen.
DAVID DARST: And your European stocks have a nice yield of about 3.8 percent, Consuelo,
versus 2 percent in the United States, and they're a 40-year low. Peter knows this, a
40-year low relative to the United States in terms of the price/earnings relative multiple.
In Europe, they sell for 12 to 13 times earnings. In the U.S., it's 15 to 16. That's a 40-year
cheapness. All you need is a little catalyst, and we think that catalyst might be September
22nd which is a Sunday, the big elections in Germany. Chancellor Merkel is likely to
be reelected for a third term.
CONSUELO MACK: So is that the positive scenario?
DAVID DARST: We think that could be it because...
CONSUELO MACK: Because she's pro-business or a known quantity?
DAVID DARST: ...she, we believe, will open up the purse strings bilaterally, not through
the IMF, the European Commission nor the European Central Bank. She would open up the purse
strings to companies, mid, small-sized companies in Spain, in Portugal, okay, in Ireland, and
we think that is a big opening of the purse strings selectively by Germany, because don't
forget...
CONSUELO MACK: So this is the German government that would be lending money under Merkel to...
DAVID DARST: 75% of Germany's exports go to the other European countries, and if they're
choking them with austerity, they cannot buy German products. So it's to help Germany as
well. So we think her legacy... you see these newspaper articles and magazine headlines,
"Gravedigger of Europe" for Chancellor Merkel. She's been tremendous by her relative calm,
and I think Peter has said it very well. They didn't explode or implode. They basically
have had their problems, and some of the recent data, the U.K. numbers, the Italy numbers
for the second quarter have come in surprisingly to the good. They've got issues. Everybody's
got issues, and I think you've got to keep that in mind, because when everything looks
sunny, then it's already in the market prices, and so this is the time to go picking around.
CONSUELO MACK: You had mentioned China and I know, David, you've got a series of articles
coming out or reports coming out of Morgan Stanley on deleveraging in China. So China,
the fact is it looks like China is slowing. It's an economy in transition. It's got some
big problems. Does that factor in to your thinking at all? Is that creating any opportunities
as a value investor?
PETER LANGERMAN: Well, it factors into our thinking in the sense that even though we're
bottoms up, we can't be blind to what's going on in the macro world, and China is such a
driver that almost any company you buy that's a global company has a significant portion
of its business either directly or indirectly dependent upon China. So you can't ignore
that, but again, it's a matter of how bad is bad, and is seven and a half percent growth
projection, is that awful? Is that likely? Is that your base case? And I guess our general
base case is that, yes, China's going through some issues. It's certainly trying to become
more of a consumer-oriented economy as opposed to the export-driven economy that it's been,
and there will be some bumps in the road. We don't view it as, again, the catastrophe
scenario.
So in fact, getting back to some spots where we found some value, and we're not really
commodity players trying to buy a specific commodity, but with all the concerns about
China, a name that's come onto our radar screen is like a Freeport-McMoRan, which has gone
through its own merger and lots of controversy about those transactions and the management
of it, but kind of caught up in this China downdraft, and we look at it and say, is it
beaten up enough where we're being compensated for the risk of a China slowdown? In that
case, we thought it was. So yes, it's creating some opportunities, but it has to be an intersection
of and of the big picture global with the bottoms up analysis. That's what we're looking
for.
CONSUELO MACK: Right. I have to ask you each, because I think you each have an interest
in Apple. That's been on your radar screen. So David, what's the current view of Apple?
DAVID DARST: Well, we like Apple. We think the stock can rise from here. It's down now
about 12 percent-ish from the beginning of this year, Consuelo. Number one, their price/earnings
ratio is very low, so basically with the $450 price in that neighborhood, that thing could
earn a $40 number. So they're selling for 11 times earnings. You take the cash out,
and it gets down well below 10 times earnings. Number two, we expect Tim Cook, who's their
CEO as you know, succeeding Steve Jobs, he has said he expects in the second half of
this year to get a contract to carry the Apple iPhone on the NTT Docomo which is their mobile
carrier in Japan and in China Mobile which has six, seven hundred million users, none
of whom have an Apple right now. So we see that as a second big driver, catalyst.
Thirdly, we expect some new product flow from them, not only an iWatch or an iTelevision,
something like that that dazzles everyone, but also the mid-range smart phone is really...
the very low end is dominated by Chinese producers and Taiwanese. The high end is Apple and its
big Korean rival. The mid area, if Apple... and we expect them to come with a cheaper
iPhone in that mid-range that people want to have that feeling of brand reinforcement.
So those reasons and number five. I left this out. Number five, they're embarking, they're
in the midst of the largest corporate repurchase program in stock market history, $50 billion
they're buying back of their stock.
CONSUELO MACK: Creating enough value for you, too?
DAVID DARST: So these five things indicate to us that it's a good place to put some money.
PETER LANGERMAN: Yeah, so the reality is we own Apple today. We bought it this year. We
watched it for a long time go straight up. It was always, at least in recent memory,
a very well-run company, very innovative, but the market was paying for that. The market
was paying a premium for that. That's not our business. So we watch it, and if we never
get our chance, so be it, but as the stock came down and got into the 400s, the sentiment
almost completely changed where they would never innovate again. The competition was
eating their lunch. They were going to eat their own lunch in the sense of having to
introduce low-priced products. Their margin structure was going to collapse. We thought
that that became so extreme that the valuation, that's what gets us. Right? So between the
cash and whether they're going to earn 40 bucks or 45 bucks or 39.50, the stock was
trading at a low enough valuation that we thought our down side was very, very limited,
and the up side, we'll let that take care of itself. You know, we're not saying that
this thing is trading at 450 and worth 1,000, but you know what? It could be trading at
450 worth 700, and that's a very nice return. So we like it very much as a value investment.
If the stock appreciates, it may be... you know, great company, well run. C'est la vie.
It's time to go.
CONSUELO MACK: Right, so activism is another area that, Peter, I know you're involved in
as well, and one of the companies that has been very much in the news is Dell, and at
Mutual Series you got involved in that Dell battle.
PETER LANGERMAN: Kerfuffle.
CONSUELO MACK: Right, so basically what's your take on Dell, and why would you choose
to get involved in a Dell situation?
PETER LANGERMAN: Sure, I mean, Dell, it's a good example of the kind of thing that we'll
get involved in, and we've owned Dell stock from time to time over the past, so we're
familiar with the company. During this latest chapter in the company's life, again, we look
at it on a very specific day-to-day basis. Obviously there was the going private proposal,
transaction. Other investors, Carl Icahn among other, Southeastern, large shareholders were
opposed to it. There was a price on the table. You know, we have to do our work. One, what
do we think the company is worth? Two is, what are the dynamics of this deal process?
Might there be other competitors? Are other people coming in, interested parties, et cetera?
What do the legal documents say in terms of the ability of somebody else to come in? And
we felt in this case that we're able to buy the stock at a level where we felt our down
side was limited in the sense that, one, if the deal didn't happen we were comfortable
that there was a base level, whether it was another recap plan or some other proposal
that would protect ourselves and, two is, we felt good enough about the values that
we were prepared to buy more stock if the stock came in. There was a lot of talk about
if the deal doesn't happen, the stock goes back to single digits or maybe low double
digits, and our judgment would have been that if that had happened, we were prepared to
buy more stock, so basically to say yes.
We don't necessarily like to take the hit of a one-day drop, but as long as we're comfortable
with the values, we can make money doing it that way. So working through those dynamics,
and then we're experienced at sort of being part of that process. So once you're a large
shareholder you, in effect, invite yourself to the table and have a seat and have discussions
with both sides, and that was the case in this situation as well.
CONSUELO MACK: And so, so far is it working out for the way you think will be good for
you as a shareholder?
PETER LANGERMAN: It is so far. Yes, this will, and we're comfortable that we're going to
make money for our shareholders which is, at the end of the day, that's our objective.
CONSUELO MACK: Right, so One Investment for a long-term diversified portfolio, David Darst?
What should we all own some of?
DAVID DARST: Well, I think you want to own Apple. We talked about Apple. Another one
that we've mentioned in the past which is Johnson & Johnson, and they have only 20%
of their sales are to emerging markets. So we see the emerging markets as a great growth
area for Johnson & Johnson. Their product suite, they've got the drugs. They've got
the consumer products, and they have the medical devices which Peter mentioned earlier is an
area that's been under a cloud, but we think they've done a very good job of managing that
business. So gross margin expansion, new CEO, Alex Gorsky, came in a year ago April, so
April 2012 he came in, and he's restructured the company and delivering shareholder value.
Made a new 52-week high as you know, but the thing still yields almost three percent, 2.9
percent, so Johnson & Johnson, but Apple and Johnson & Johnson. Put those in your portfolio.
That's what we'd say right now.
CONSUELO MACK: All right, and what would your choice be?
PETER LANGERMAN: Both nice companies, by the way. Well, I'd go back to one of the companies
I mentioned which is Metro, which again most people probably haven't heard of who live
here. It trades in Europe, but it's got this combination of internal restructuring, new
CEO in a spot globally that people are negative on, this euro focus that I think they will
be able to take advantage of. The stock had a bit of a run because people have started
to believe in the story. It's still got a long way to go, so I think that's the kind
of name, limited down side we think, nice up side, a lot of different dynamics, a lot
of different things that they control that will make for a very successful investment
here.
CONSUELO MACK: All right, well, let's see what happens to all of them. Thank you both
so much for joining us, Peter Langerman for the first time from Mutual Series.
PETER LANGERMAN: My pleasure. Thanks.
CONSUELO MACK: Appreciate having you on WealthTrack, and David Darst, it's always a treat to have
you back.
DAVID DARST: Good to be with you. Thank you, Consuelo.
CONSUELO MACK: At the conclusion of every WealthTrack we always try to leave you with
some suggestions to help you build and protect your wealth over the long term. This week
we wanted to share two investment book recommendations from our guests for your end of summer reading.
David Darst's choice is an investment classic first published in 1935 during the Great Depression
era. It is The Battle for Investment Survival, written by then influential money manager,
financial writer and author Gerald Loeb. Darst describes it as a guide to help investors
navigate the market's twists and turns both tactically and emotionally. As Loeb so presciently
put it: "The most important single factor in shaping security markets is public psychology."
How right he continues to be!
Peter Langerman recommends the much more recent biography of a fellow value investor, who
was the Canadian equivalent of Warren Buffet, titled, There's Always Something to Do- The
Peter Cundill Investment Approach. It is based on Cundill's interviews, speeches and the
daily journals he kept for 45 years chronicling his successful search for bargains around
the world.
Next week we are going to explore real estate investing with Third Avenue Real Estate Value
Fund's Jason Wolf, who works with legendary investor Marty Whitman. He and award-winning
wealth manager Gregg Fisher will discuss the opportunities they are finding in global real
estate. If you have missed any of our past Great Investor or Financial Thought Leader
guests you can find them on our website wealthtrack.com as well as access exclusive interviews and
research in our WealthTrack Extra feature. In the meantime, have a great weekend and
make the week ahead a profitable and a productive one.
WealthTrack #1009- 8/23/13 [music]
[music]
[music]
[music]
[music]
[music]
[music]
[music]
[music]
[music]
[music]
[music]
[music]
[music]
CONSUELO MACK: This week on WealthTrack, a top performing mutual fund manager and award
winning financial planner explain why they are building up their global real estate holdings.
Third Avenue Real Estate Value Fund's Jason Wolf and Gerstein Fisher's Gregg Fisher on
the opportunities they are finding in real estate around the world are next on Consuelo
Mack WealthTrack. [music]
[music]
[music]
[music]
[music]
[music]
[music]
[music]
[music]
[music] SPONSOR: New York Life along with MainStays
family of mutual funds, offers investment and retirement solutions so you can help your
clients "Keep Good Going." [music]
[music]
[music]
SPONSOR: Additional funding provided by: Loomis-Sayles - investors seeking the exceptional
opportunities globally. The Wintergreen Fund - your home for global
Jason Wolf is co-lead portfolio manager of the Third Avenue Real Estate Value Fund among
others. In 2004 he joined the deep- value investment firm founded and still run by investment
legend Marty Whitman and initiated their foreign real estate coverage including Third Avenue's
now substantial Hong Kong real estate holdings. Gregg Fisher is the Chief Investment Officer
of Gerstein Fisher, an independent investment management and advisory firm he founded in
1993. Gerstein Fisher was named to Barron's list of top 100 Financial Advisors in 2013.
Its Gerstein Fisher Research Center works which works with leading academics recently
published a paper on real estate investment trusts and the firm recently launched a mutual
fund to invest in global commercial REITs. I began the interview by asking them about
our home market, their assessment of the U.S. housing recovery.
JASON WOLF: Well, I don't think that there's any doubt that we've come off of the bottom
within the real estate and particularly in the residential businesses, but the inventory
levels have come down. Housing starts have started to come up. A lot of the businesses
such as homebuilders have started to lead the charge. The performance in the stocks
have been fantastic over the past two years, but now the inputs are starting to move which
is the timber companies, the land development companies and whatnot. So there's different
pockets of the United States that have done really, really well, and it has been helped
out by the private companies coming in, private equities come in and soaked up some of that
foreclosure inventory, and they're now renting some single-family homes. So I think you're
in the third or fourth inning in the recovery in the housing market, and you have some ways
to go.
CONSUELO MACK: Gregg, what's your take?
GREGG FISHER: Yeah, I would agree. I think you just have to keep an eye on the economy.
There's a lot of history around this. You see economies moving along, and there's a
bit of a momentum effect. Industries come into areas. It could be the technology sector
coming into the New York. It could have been the technology sector that came into California.
You know, when economies are robust, industries come into areas. They start building. We then
need housing for the people that come to work for these companies. Then we need things like
movie theaters and bowling alleys and I think...
CONSUELO MACK: Right, this is the Dakotas, for instance, right.
GREGG FISHER: Yeah, absolutely. I think that if the economy continues to move along at
some reasonable pace, which seems to be happening, that the odds are that the housing market
and the real estate market would continue to do well along with the economy.
CONSUELO MACK: So what's the situation with the global real estate market?
JASON WOLF: Yeah, well, there's just been an explosion of publicly traded real estate
stocks over the past decade. Right? The securitization of real estate, a lot of private wealthy families
have listed their companies on the exchanges from Malaysia to Singapore to Philippines,
set there. That also offers us opportunities as value investors, because each market doesn't
that's going through a massive distress and a restructuring.
JASON WOLF: It's IVG Corporation, and so you have opportunities there, but as a whole Europe
and commercial companies having a hard time while U.S. real estate companies are doing
are moving, and it's very good for stock pickers.
GREGG FISHER: Well, I think when you think about all the different things investors can
resources. There aren't that many other things, but when we look at investors on average in
or even real estate in general. It's not uncommon for an investor to own their home or maybe
a second home, but as a percentage of their net worth, commercial real estate tends to
what exposure they have to foreign real estate markets. So if you're just wanting to add
adds a diversification benefit to the portfolio, global real estate seems to be something that
CONSUELO MACK: So Jason, let me pick up on that, because you work, of course, for the
legendary Marty Whitman at the Third Avenue Funds, and you actually, when you joined the
real estate. And so from your vantage point as a deep value investor, what's the appeal
JASON WOLF: Well, look. As I was underwriting the businesses, it's one thing that we look
really create a lot of long-term wealth for businesses, and three are urbanization, rising
areas of the world, it looks like the long-term wealth creation available to buy publicly
that's where we went in heavy in Asian markets.
JASON WOLF: That's right.
of Li Ka-shing, and this is a business that is much more than a Hong Kong real estate
company. Its exposures are all over the world. It's the largest port operator in the world
world as well as a large developer in a number of other businesses, but trades at 10 times
you look at the long-term growth potential of the business, we feel really good about
CONSUELO MACK: So real estate investment trusts and, Gregg, you recently launched a fund that
an asset class, have been incredibly popular in the last several years because they are
GREGG FISHER: Well, again I would approach this from an asset allocation point of view
about REITs in the context of a total portfolio and total return and think about what percentage
of your portfolio do you already have in this asset class, should it be there and how to
of their stock market allocation. I've seen investors where they think of this as an alternative
to a bond, and REITs are not bonds. I would look at them the way I would stock market
different. A large component of REIT returns is the ordinary income, and we think that
by law because they don't pay taxes. Right.
typically own these things inside tax deferred retirements accounts because the tax attributes
this into their portfolio, if there's a way to do it inside a tax deferred account, it
CONSUELO MACK: Because they're taxed at ordinary income.
them just they're income vehicles, but they don't have the characteristics of income vehicles?
deviation, and you compare them to the stock market over a long period of time, they look
very similar. They move around a little bit differently, but for the most part you're
and equities have been very similar over a long period of time. So I think investors
buy them and also how much of them they should own.
CONSUELO MACK: So Jason, how are you looking at REITs? And I know that at the Third Avenue
So talk to us about the changes that you've made and how you view REITs at this point.
now with our fund, and it's been heavily influenced by Marty Whitman's philosophy of owning companies
REITs just don't fit that bill. Today...
JASON WOLF: Well, because of the dividend obligation companies have to pay out the majority
of their cash flow to their investor base, and so as they pay out the shareholders their
a very sensitive issue, and it makes the financial crisis highlight some of the issues these
equity markets and without being able to get access to the debt markets. And what's gone
driven way down, as stock prices have lifted and interest rates have come down, so it's
been an unprecedented period of access to capital for the REITs, so it's been pretty
CONSUELO MACK: With interest rates, it appears, going to start to rise, is it going to be
to raise cash in the debt market?
interest rate environment doesn't have to be bad to all real estate companies, and we
in a potentially rising rate environment. I think when you look out five years, which
how rates won't be higher, and I hope they are, because that means the economy is better.
Right? You don't want the shock that Gregg mentioned earlier in rates rising, and the
that don't create a lot of long-term value. I think you got to maintain a portfolio that
that you own with catalysts involved to unlock the value, and then I think you have to have
CONSUELO MACK: And so the theory of owning real estate operating companies, the for-instances
JASON WOLF: Yeah, yeah, absolutely. They're mainly involved in the development process
today, but they generate it over time through the stabilization of development properties.
it's a Cleveland-based company that's been around for a long time. 1960 it was listed,
to develop into urban areas large complicated long-term projects like the Atlantic Yards
CONSUELO MACK: So Gregg, REITs, you've got a REIT fund now, so listening to the issues
GREGG FISHER: Well, I think the point Jason made earlier about, you know, interest rates
who's a co-portfolio manager with me on our fund, and what we showed was we analyzed REITs
across all countries, and we took a look at the effect that leverage had in REITs through
I either have them, thinking about adding them, and I'm concerned about interest rates,
and also the kind of leverage like long-term debt might be better than short-term debt.
In our research we showed that leverage magnified the losses of the REIT market during the financial
of assets, but in the REIT marketplace, because of the way these REITs are capitalized and
the way they had to actually sell equity to raise money to buy properties during the decline,
fully on the way up. So our thinking is at a minimum to reduce risk and we think possibly
without reducing return, we would look at the REIT markets and the REITs that have less
GREGG FISHER: It's a value characteristic, but it's particularly interesting now with
real estate investment trusts. So again, why global as opposed to the U.S.? Do you think
the U.S. REIT market, for instance, is overvalued at this point after the big run up?
pricing risk. So whether a market's over or undervalued is a difficult task, but I do
going on around the globe. The idea of having all of your money in any one country in any
asset class I think just never made sense, and it particularly doesn't make sense with
methods to manage assets, and five or six years ago, what we're doing today wasn't even
real estate characteristics globally within seconds, the amount of data that exists from
how much information we now have available. These markets have become far more liquid,
things in a way that we can all feel comfortable than it was just a few short years ago.
CONSUELO MACK: And would you agree with that, how the Internet has basically changed everything?
disclosures of their portfolios, and the data explosion is real, and so you can really underwrite
businesses on a bottom up fundamental basis like we do, using all of the tools of the
CONSUELO MACK: So Jason, talk to us about a couple of the other companies that you are
JASON WOLF: Well, I think everybody today in the United States should have exposure
a very easy business to understand. It's super well-financed, trades at a large discount
JASON WOLF: Yeah, right. It's a timber company. They own seven million acres of timberland
on but are going to become very valuable, and that's a homebuilding operation, a wood
the stock trades at about a 20% discount to net asset value. It offers a three percent
particularly housing starts which is the first input into the housing business.
that you are excited about as well? GREGG FISHER: The things that we're doing
discussed earlier or value characteristics or even smaller REITs versus the larger ones.
risks that we want our clients to have exposure to, smaller REITs, less levered REITs. We
certainly are looking at value characteristics to make sure we're buying ones that we think
What we know about security prices over long periods of time is they tend to move in directions
CONSUELO MACK: Even with high-frequency trading? I mean, that has not changed?
more even in the REIT market than any other asset class. What we see is that REITs that
than their peers a little longer than perhaps the fundamental should. So we do expose our
portfolio a little more highly to momentum than perhaps the market would or some other
JASON WOLF: I was about to say I think it's exactly the opposite of. I mean, we're highly
focus on extreme attention on the balance sheets of companies and trying to figure out
what the growth prospects of the assets within each company is as well as really doing a
as operators and as capital allocators and try to buy those businesses at a significant
What percentage do you think that we all should have in a global real estate investment trust?
GREGG FISHER: I think that a default position might be for an investor to have somewhere
GREGG FISHER: Absolutely, both U.S. and non U.S. REITs. This would depend upon their other
exposures, the homes they own, the real estate they may own elsewhere, but without that being
how much the real estate values across the globe really are worth, because the majority
but none of us actually know. What we do know, though, is that the public real estate markets,
which we have a market price on, is a tiny fraction of that. The potential for the global
significant, but back to your question on asset allocation. I think if you take that
CONSUELO MACK: And one last question on this line for you, Jason, is, so would you agree
you could invest in, that global real estate is a place that you see tremendous potential
JASON WOLF: I do. I just would do it, frankly, a little bit differently. Right?
other markets that are offering very, very good pricing today such as Brazil and India.
up strategy, you can really put together a portfolio that should significantly outperform
CONSUELO MACK: Right, in real estate.
for long-term diversified portfolio, what would yours be?
majority of investors that we come across have very little, if any, exposure to this.
real estate market is a very robust place for people to be looking out over the next
JASON WOLF: I think it's Forest City Enterprises, our largest holding in the fund. It's a fantastic
gateway markets. It's involved in some complicated developments that tend to be very profitable
CONSUELO MACK: All right, we'll leave it there. Thank you both so much for joining us and
GREGG FISHER: Thank you.
to help you build and protect your wealth over the long term. This week's Action Point
Jason Wolf and Gregg Fisher made some compelling arguments about the value, appreciation and
fact that Wolf was able to convince his boss, deep value investing legend Marty Whitman
is considered to be one of the best in class.
Ron Baron's shop. It is the Baron Real Estate Fund, launched by portfolio manager Jeffrey
If you have missed any of our past Great Investor or Financial Thought Leader guests you can
in our WealthTrack Extra Feature. Thank you so much for joining us! Have a great weekend
[music]
value. ...and Rosiland P. Walter
[music]