Winters: The Great Opportunities Are Beyond North America
The Wintergreen manager says maturity and leverage will put a cap on U.S. returns; plus, why he shifted assets from Berkshire to Fairfax.
Jason Stipp: I'm Jason Stipp for Morningstar. Despite a few fits and starts in the global markets, equities have generally continued their march upward. So where in the world to find value?
We're lucky enough today to be sitting down with David Winters of the Wintergreen Fund; it's a global fund, one of Morningstar's favorite fund managers.
He is going to tell us a little bit about his portfolio today and where he's seeing some of those opportunities.
Thanks for joining me, David.
David Winters: Jason, great to see you.
Stipp: So the first question for you, you and I were both at the Berkshire Hathaway meeting a couple of days ago. You recently made a change in your portfolio where you trimmed Berkshire and you bought a little bit of Fairfax. These companies are similar in some ways, so I wanted to ask you, do you consider this sort of an upgrade, or what was some of the thinking behind that particular portfolio move?
Winters: Well we really like Berkshire. Berkshire, though, is a $200 billion-plus company, and they are very much in the lifecycle that they're going more into like a trust-fund mode, and so we think the returns, as they've said, are going to be lower in the future. So we decided to take some money off the table and look for a similar company, insurance with an equity portfolio and a bond portfolio, and Fairfax is much smaller than Berkshire with a great record, and so we thought it was a good idea to make that switch and an upgrade hopefully in returns.
Stipp: I know a lot of Berkshire shareholders are worried about the succession issue. This has been a question on their minds for a long time. How do you think about that and does that factor into the possible future returns that Berkshire might have?
Winters: I think it's going to be very hard to succeed Warren Buffett and Charlie Munger. I think whoever has that seat, it's going to be a hard seat. I think they'll figure it out, but the likely returns are going to be lower, and that's what they say as well.
Stipp: I wanted to step back and look at your portfolio, the domestic versus the overseas portions of your portfolio.
Our analyst noted that in your fund the overseas exposure is at a high-water mark right now, but I think it's an interesting question because obviously where a company is domiciled isn't necessarily where its business exposure is. Given that, what can we make about your foreign exposure in the portfolio?
Winters: Jason, the way we look at it increasingly is on a look-through basis, so not necessarily where a company is domiciled, but where their earnings are.
We think the great opportunities today are beyond North America and are certainly beyond the U.S., and so we're finding a lot to do in the Far East, we're finding a lot in Swiss companies that have operations around the world, and even in Canada.
Stipp: Would you say that you tend to avoid countries then that have certain exposures in the U.S. and also to what extent does the valuation play? So if you find a good value but some exposure to North America, how do you weigh those factors?
Winters: Well, we still find things to do in the U.S. all the time, and we love it here, but in terms of the U.S. being a mature society with a lot of leverage, I think it puts a cap on returns. So we prefer to find companies that are well positioned on a global basis with the diversification to earn in lots of different currencies.
Stipp: I wanted to dig into your portfolio a little bit and talk about some of the holdings. When you're looking at your top five, top 10 holdings, comparing their current market values to what you think the correct valuation is, the intrinsic value, are there any names that you're particularly excited about right now?
Winters: There's a number of them that we're particularly excited about. I mean we really like Swatch very much. We think that the prospect...they can't make the watches fast enough. We like Genting, which is a Malaysian company that's a gaming company that's going very well, and we think there are big discounts. Jardine Matheson trades at a big discount, and the business prospects are excellent.
Stipp: So there's still a lot of room to run you would say for those top holdings?
Winters: I certainly think so.
Stipp: Sort of a related question, when you think about your sell discipline, at what time would you start to trim those holdings? Is it when they reach fair value? Do they have to go above fair value? How do you think about selling?
Winters: Well, we think about selling when a company that we still like begins to approach fair value, because it's not an exact number or if the fact pattern changes or if we just find something that's better.
Stipp: Okay. I wanted to talk to you a little bit about the opportunity set that you're seeing out there right now. Your cash take is in the mid-teens approximately based on the data that we have. What does that say compared to where it's been before and what does that tell us about whether you're finding opportunities or not finding opportunities today?
Winters: Well, the cash has fluctuated to almost high-20s as low as high-single digits. I think it just depends on what we're finding on a daily basis. We think there is a lot to do. We're very busy looking.
Stipp: Okay, and speaking of looking, you run a global fund. You invested even in different asset classes when you're finding opportunity there. My question for you is, how do you start to narrow down this wide investment universe to the companies that have the qualities that you look for? Do you do quantitative screens? Do you have a shortlist in mind and you wait for a good value? What's your process there?
Winters: We have a wish list, but we also have what we call ultimately the trifecta. We want good businesses with improving economics, we want management that's excellent, and we want a low price. So even if there are tens of thousands of public companies in the world, Jason, when you start putting a filter on it, it gets much shorter quickly.
Stipp: Do you think that that list has been getting shorter over time as the markets have continued to do well or is it kind of growing in some areas? How would you characterize it?
Winters: Sometimes it's like an accordion. It goes up and down, and it really depends. Sometimes a company will fall out of bed for whatever reason, and it becomes interesting. So, I mean, you would think as markets go up there is less to do, but also business prospects are getting better.
Stipp: Well, David Winters, thanks so much for joining me today and for your insights on the global markets.
I'm Jason Stipp for Morningstar. Thanks for watching.
Jason Stipp does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.