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Sunday, November 27th, 2011
This week, on WealthTrack, Consuelo Mack interviews Sir John Templeton’s successor. At only age 27, Mark Holowesko took over the legendary Templeton funds in 1987, and ran them successfully for over 13 years before striking out on his own at Holowesko Partners.
Holowesko, a Bahamian native, explains how he still applies “the Templeton way” and why he sees fantastic opportunities in today’s markets.
Source: Wealthtrack, November 25, 2011.
Here is the full transcript:
Consuelo Mack WealthTrack – November 25, 2011
CONSUELO MACK: This week on WealthTrack, the legacy of legendary global investment pioneer Sir John Templeton is alive and thriving thanks to the talent of his protégé, Great Investor Mark Holowesko. Olympic sailor, triathlete and successful money manager, Holowesko is finding exceptional value all over the world. A WealthTrack exclusive with Mark Holowesko is next on Consuelo Mack WealthTrack.
Hello and welcome to this edition of WealthTrack. I’m Consuelo Mack. We have a unique treat for you this week- a television exclusive with a Great Investor, Mark Holowesko. Does the name sound familiar? It might, because way back in 1987, before the famous market crash, legendary global value investor Sir John Templeton picked the then 27 year old Holowesko to run the Templeton Funds for him, a job he performed successfully for 13 years. In 1992, he was the youngest person on Fortune magazine’s list of the best money managers of his generation. In 2000, he got off the non-stop travel treadmill required to run the Templeton Funds and launched Templeton Capital Advisors to serve institutional and high net worth clients. That firm has been renamed Holowesko Partners, which Mark continues to run out of his native Bahamas. The super competitive Holowesko is an avid athlete: cyclist, swimmer and Olympic sailor who was cited by BusinessWeek magazine as one of the “World’s Fittest CEOs.”
As you will see in a moment, Holowesko has absorbed many of the attitudes, disciplines and lessons of his famous mentor with a few tweaks. One lesson he has embraced completely is to keep an open mind and constantly look at the opportunities the market is offering- right now, Holowesko believes the opportunities for investors are fantastic. You heard me correctly. He is finding values he hasn’t seen since the depths of the market lows in 2008 and 2009. We’ll find out where in just a moment.
I began the interview by asking Mark about the major investment lessons he learned working with Sir John.
MARK HOLOWESKO: It was a very simplistic thing. He walked into my office. He put the funds on my desk and he said, “Look, from now on I want you to manage these funds, but write the buy and sell tickets and leave them on my desk so I can see what you’re doing and I’ll sign them and leave them at the trading floor.” And that was at about 11:00 in the morning and at about 11:15 I left to go for an early lunch and a very long run because it was a bit of a shock and a huge responsibility, but a lot of fun.
CONSUELO MACK: So how did you feel at 27 running, it was Templeton Growth, World, and Foreign Funds, right?
MARK HOLOWESKO: And the Templeton Smaller Companies Fund. So actually all the mutual funds that Templeton had at that point at time were all managed in the Bahamas by Sir John until May of ’87 and then I managed all the funds. I had a lot of help in Fort Lauderdale. We had a great staff of analysts in Fort Lauderdale. I was probably a little too young at 27 to truly to understand what was happening and to appreciate the fact that I was taking over the management from such a legend, but there was so much to do and there was so much going on in the world. You know, we had the crash a couple of months later. He was there during the crash which was a big help and a big comfort, and it was also the most excited I’d ever seen him, which was really interesting.
CONSUELO MACK: So tell me about that. Is that one of the points of maximum pessimism that he just loved?
MARK HOLOWESKO: Most definitely. He went on a number of programs right after that crash basically coming out and saying this is a great opportunity. There was a very technical decline and I think that was shown by some of the studies later on. And you know, stock prices were 30% cheaper than they were several days before that or two days before that. So from his perspective it was just a great opportunity to take advantage of the fear in the market and looks for ideas. And we had cash in the fund so we were lucky enough at that point in time- I don’t remember the exact amount of cash in the fund, but we had cash we could put to work so that was very helpful.
CONSUELO MACK: So you just said you had to put for what period of time, every – of course, that was in the days when you wrote out order tickets.
MARK HOLOWESKO: That’s right.
CONSUELO MACK: So you had to put, what, the stack on Sir John’s desk and he would go through them?
MARK HOLOWESKO: Well, there wasn’t really a stack because we only had about a 20% turnover in our portfolios. You know, one of the things that was just a big shock and a surprise when I came to Sir John was he had these positions that had 100% returns or 1,000% returns in the case of telephones in Mexico because they’d been there for so long and, obviously he was right as well. So it wasn’t daily trading activity in the funds because that wasn’t really our style. But the first six months that I put the ideas on his desk he never changed a trade ticket, and then I think about eight or nine months later he said, “Just pass them on to the trading room.” And he could see the trades going through because we had some automation by that time, not a lot. So he oversaw it and he was there. He was helpful in terms of ideas and bouncing things off of. When I saw his enthusiasm in ’87 during the crash, that helped give me some confidence to do things and that was a big help.
CONSUELO MACK: So what are the major investment lessons that you learned working for and with Sir John?
MARK HOLOWESKO: I think the first lesson I learned was to try to understand and really put into mathematical terms what problems were. So one of my first jobs was trying to determine the financial impact of the Bhopal disaster on Union Carbide. And what he wanted me to do was to basically quantify it, you know, which is a very difficult thing to do. It’s sort of like trying to quantify the BP disaster in the Gulf. So I would say trying to understand problems and trying to see whether or not those problems were properly reflected in stock prices. In order to be a contrarian, you have to do what other people aren’t doing. But he wasn’t a contrarian for contrarian’s sake, he tried to understand the issue and why people weren’t doing certain things and whether or not he felt the markets took that into consideration in terms of the valuation.
CONSUELO MACK: So if for instance, a lot of it then was an event driven type of analysis? If there was an event that impacted the price of a stock, then you and Templeton would be activated to look into whether or not this was an opportunity?
MARK HOLOWESKO: Right. A lot of our ideas, I would say a third to a half of all of our ideas came that way. So for example, in ’98 during the Asian crisis, you know, that was an opportunity. That was an event that occurred that pushed stock prices down quite substantially. You know, back then you could buy cash at a discount. And there wasn’t necessarily a catalyst to turn around the problem or the stock price relative to the problem, but the problem drove stock prices down and we tried to react to that as much as we could.
CONSUELO MACK: So aside from events, what are the other things that would make you look at companies to decide whether or not you were interested in them?
MARK HOLOWESKO: Well, a number of things. One of the things that we always tried to do is try to understand what we are paying per unit of whatever the company did. So if it was a timber company, what was the value in the marketplace or the enterprise value, which is the market cap plus the debt of the company, net debt, per acre of timberland? You know, that’s a lot more interesting to us than to look at the book value of a company or the earning stream of a company. So trying to figure out what are you paying for this company per unit of whatever it does and then it gives you a much better sense of is that reasonable. If it’s an asset management company, what are you paying per dollar of asset management? If it’s a soda manufacturer, what are you paying per can of soda they sell? And he had me do a lot of that work when I first came on board just to basically understand, first of all, what it means to buy a company. Not just the market value of the company, but what you’re assuming in terms of liabilities on the balance sheet.
CONSUELO MACK: So let me take you one step back from that, and that is how do you decide to look at a particular company to begin with aside from a disaster? With Sir John and for you now at Holowesko Partners, do you just have a list of companies that you monitor on a regular basis?
MARK HOLOWESKO: No, not really. We do a number of screens. It’s easy to find problems. Problems are very prevalent all over the world so they’re pushing stocks around dramatically. So stocks that come up into our screening because of problems are plentiful. But we do a number of screens on valuation criteria that we’ve used historically whether it’s private market values. And they’re normally associated with a theme. So for example, we think merger and acquisition activity will pick up quite substantially right now or over the next six to twelve months and as a result of that we’ll do a lot of screening for companies that we think might be attractive candidates in that regard.
CONSUELO MACK: And the reason you think that M&A activities are going to pick up in the next several months is why?
MARK HOLOWESKO: Simply because there is too much capacity in the system today, too much physical capacity. Capacity utilization is lower than normal, so companies don’t need to build capacity and the cost of borrowing money relative to the return on assets that you can get if you actually go out and buy a company, that spread is very wide. So mathematically it makes a lot of sense for companies to go out and buy assets rather than to build assets.
CONSUELO MACK: So it’s interesting because there has been a great deal of talk about the fact that companies are sitting on these hoards of cash, and the fact that they aren’t putting this cash to use. So is there going to be some sort of a global catalyst that is going to make companies suddenly start to spend the cash and actually make acquisitions?
MARK HOLOWESKO: There are a number of catalysts that I think will occur. First of all, the cash is building up to such an extent that at some point the firms will become targets themselves. You know, most pharmaceutical companies that we look at today, over the next five years will generate anywhere between 80 to 100% of their market value in cash.
CONSUELO MACK: Wow.
MARK HOLOWESKO: And so obviously five years from now you’re not going to be able to buy Merck or Pfizer or Sanofi at net cash. You know, get cash and then a business for free, in fact. And that won’t stay like that. And I think it’s either going to be acquisitions. They’ll make acquisitions. They’ll make huge stock repurchases. They’ll increase dividends. That’s cash build on a balance sheet. There are only so many things you can do with it. You can let it build and already for a lot of firms it’s 15 or 25% of their market cap. You can buy back stock and that’s very supportive for stock prices. You can increase the dividend. You can get involved in mergers and acquisitions or you can increase your capital expenditures. Because there’s too much capacity basically in the world, the capital expenditure part of that equation is not going to really happen.
CONSUELO MACK: So in your experience is this a very unusual situation where you have corporate balance sheets in such great shape, that are so liquid?
MARK HOLOWESKO: I think there are a couple of things that are very unique about this period. Not only are stocks extremely cheap relative to history and relative to other assets, but the best quality companies are at a discount to the market as well. So typically you have to pay up for quality and today you don’t.
I mean, quality is being given away in many respects. So I think people really underestimate how cheap securities are today. I think they’re as cheap as stocks were back in the early 1980s. And I think in addition to that, the financial position of these companies is fantastic. You know, most of our holdings in the United States, for example, can pay off all of their net debt with 20% of one year’s cash flow.
Those that don’t have, you know, a lot of them already have net cash flow on the balance sheet. The United States is generating about six or seven percent in free cash flow every year relative to the market value stocks, which is a huge amount as well. So there is an enormous amount of free cash flow being built up on these balance sheets. So the companies are as cheap as they were in the ‘80s, but much better quality balance sheets.
CONSUELO MACK: So when I looked at a recent report from Holowesko Partners I think you had 19 stocks that were 46% of your portfolio holdings. Is that a concentration that is something that you learned from Sir John? Is that a concentration that is typical of the way that you run money as well?
MARK HOLOWESKO: We were somewhat mindful of Warren Buffett’s famous phrase that “diversification is protection against ignorance.” At some point you can be too diversified in terms of what you’re doing. We don’t turn over our portfolios a lot. You know, if we like a position we tend to build two to three percent, you know, position it. So we tend to own about 70 names in the portfolio.
CONSUELO MACK: And the average holding period? I mean, what kind of turnover do you have and has it changed since Sir John’s time?
MARK HOLOWESKO: Not really. It hasn’t changed that much. The first name we bought in our fund 11 years ago we still own today.
CONSUELO MACK: Which is what?
MARK HOLOWESKO: Yu Yuen, which is a shoe manufacturer in Hong Kong. And we have about a 20 to 30% turnover in our portfolio generally in the course of a year.
CONSUELO MACK: Some other lessons that you learned from Sir John that you’re applying at Holowesko Partners as well? Are there any other major ones that come to mind?
MARK HOLOWESKO: Well, I think one of the things that most people don’t realize is that Sir John was a big fan of basically changing your investment approach all the time. You know, we maintained a list of stock selection methods at Templeton. As the Director of Research, I was sort of responsible for monitoring that, and he always wanted to have 12 new ways of looking at stocks. Most people think there’s a Templeton formula.
CONSUELO MACK: Formula. There have been books written about it.
MARK HOLOWESKO: And to a certain extent there is a bit of a formula and when you’re selling an institutional product, you have to have some consistency in your products all over the world. We used to do a lot of work relative to future earnings and trying to discount future earnings to today’s stock price and looking at dividend streams over that time period. But basically Sir John said if you’re doing the same thing you did ten years ago, it’s not going to work.
So I would say we’re constantly trying to improve on what we do and I also would say that the market is always offering me something. I think this is something that Sir John was very good at. Sir John’s genius was in his simplicity, really. He was always very good at identifying what was cheap in the market. So at some point in time growth stocks might be cheap, other times value stocks might be cheap.
Today what’s cheap in the market is free cash flow. Free cash flow is abnormally high. And what he tried to teach us is find what’s cheap in the market, what is the market offering you, and then try to understand, well, why is it cheap, what is the rationale behind those prices being so low? So flexibility in the investment approach was very important and changing your investment approach to sort of accommodate with what the market is offering you was very important as well. So I think those sound very simplistic, but once again, that was part of his great genius.
CONSUELO MACK: Are there any general rules of investing that are kind of the Templeton way or have become the Holowesko way?
MARK HOLOWESKO: Well for a long time, Templeton liked to try to find a normalized earnings number over a full business cycle. So many people concentrate on the next quarter or what the company will do this year, but he felt that the more efficient part of the market was farther out. Because people weren’t willing to look that far out or they weren’t comfortable holding securities for that long.
So he felt that the shorter term was much more efficient than the longer terms. So therefore, we should concentrate on a longer term. And for him he felt that a normal business cycle was five years. And so we could figure out what a company could earn on a normal basis, assuming a recession and a contraction over that five year time period and discount that back to today’s stock price. I think that is a popular formula that a lot of people hear about in terms of what we used to do at Templeton.
Look, we used to do things, Consuelo, that were- I used to go home sometimes and tell my wife, “You wouldn’t believe what we did today. It was so simple.” And stocks that were ranked 1-1 by Merrill Lynch or 1-1 by Value Line with the theory that Merrill Lynch was the biggest retail broker in the world back in the ‘80s and Value Line was the biggest institutional seller of ideas and if stocks were most highly ranked on both systems they were going to get a lot of attention. We’d narrow the list down on that basis and then we’d go out and work on those stocks. And it was incredibly simplistic and it was a lot of fun. Sometimes, you know, you’d scratch your head and go home and think, boy, you know, I just can’t believe I got a master’s degree in finance and this is what I’m doing here.” But it was great fun and it worked.
CONSUELO MACK: I know that one of the things you told me is that you expect to be wrong a third of the time.
MARK HOLOWESKO: I hope to be wrong a third of the time, yeah.
CONSUELO MACK: You hope to be wrong only a third of the time. I seem to remember Sir John had a higher number that he expected to be wrong. But at any rate, so therefore, your job, your number one job is manage risk?
MARK HOLOWESKO: By far. That’s true. I mean, I want to know how much money I can lose with every single stock I’m invested in all over the world, as much or more so particularly in this sort of environment, than how much money I can make. So I maintain in my portfolio not a target on the buy names in terms of the upside, but a risk number. You know, if we’re wrong, and a third of the time we’re wrong, how much money can I lose? We challenge our analysts all the time about those numbers. And about a third of the time we’re wrong on those numbers as well. If we think the stock price bottom might be ten and we’re wrong and it goes to eight then we have to sit around the table and talk about why we were wrong. Is this very temporary in terms of where the stock price is?
CONSUELO MACK: So that’s not an automatic sell decision?
MARK HOLOWESKO: Absolutely not. No. I think the most important thing when you’re wrong is to try to understand why you’re wrong and then to try to determine whether or not you’re okay with that. You know, that the longer term thesis for owning the stock is still in place. If a stock goes down and you don’t understand why it’s gone down and don’t understand why you’ve been wrong, then I think it’s really silly to maintain that position.
CONSUELO MACK: Is the market offering you up opportunities that Sir John would be saying “look at this”?
MARK HOLOWESKO: Well, we are 104 % invested and we don’t often become 104% invested on the long side than our typical product. We have more ideas than cash at the moment.
CONSUELO MACK: And when was the last time that happened?
MARK HOLOWESKO: Five or six years ago, I would say.
CONSUELO MACK: And again, when I looked at the portfolio, the most recent one that I was able to see, there were a lot of global names there. You know, like Johnson & Johnson and Kimberly Clarke, as I mentioned, HSBC, U.S. Bank Corp. I mean, there were a number of companies. So what do they all have in common? I mean, what is it that they represent?
MARK HOLOWESKO: Well, you mentioned that stock list of 19 names that you saw. And I’ll give you an idea of what they have in common. First of all, they have phenomenal balance sheets. Most of those companies, once again, have net cash on the balance sheets and those 19 names on average can get rid of their debt with 20% of one year’s cash flow. They yield 3.6% on average which is 160 basis points higher than the ten year treasury. And to give you a sense of how cheap that- that is, if you just assume that those 19 names grew their dividends by the same rate over the next ten years as they did over the last ten years, and then you said, okay, well, how much would those stocks have to fall in order for me to get the same return on those 19 stocks as the ten year treasury?
Those stocks would have to fall 40% because the ten year treasury yields two percent and these stocks yield 3.6 percent. Some of them, like Johnson & Johnson that you mentioned, have been growing their dividends for the last 20 years at almost 14%.
So as a collection, these stocks offer much better yield than you’re going to find anywhere else in the world. These businesses are doing much better than most people anticipated because a large portion of their business is actually outside of the United States. So although the U.S. economy is only growing two to three percent at the most, these businesses are growing at revenues six and seven percent and their growing their earnings higher than that. They’re doing that because a good bulk of their business is overseas and the overseas markets are growing much faster.
You know, I’d say that it’s very easy to find companies that have grown their dividends consistently for 20 years, that are selling at nine or ten times earnings with seven or eight percent free cash flow yields with net cash on their balance sheets that have the ability to grow their business the same way they’ve done.
And in many cases, even if you looked at the past ten years, which was a very difficult period- we’ve had two of the worst recessions in history- and a lot of these firms have done incredibly well over that time period, so it’s not inappropriate to think that they’ll do equally as well over the next ten years. So I just think people are spending so much time thinking about overall risk, about sovereign risk as opposed to company specific risk, and they’re making these asset allocation decisions that’s a risk on, risk off trade that totally ignores company specific valuations and it’s providing opportunities, in my view, that are consistent with the early 1980s.
CONSUELO MACK: We ask each of our guests if there is one investment that we all should own some of in a long term diversified portfolio what would it be, so what would it be?
MARK HOLOWESKO: Well, I’ll say generally common stocks, most people are afraid of common stocks. And I would say specifically here in America, I really think people are going to be surprised at the amount of income that companies produce. There are only four companies in America that have a AAA rating. I think they’re Exxon, Johnson & Johnson, Microsoft, and ADP. And of those four names- there are only four of them- and of those four names, three of them are on what’s called the Dividend Aristocrat List. Companies that have grown their dividends for 20 years.
CONSUELO MACK: So Exxon, Johnson & Johnson, and ADP?
MARK HOLOWESKO: ADP. Those companies, not only do they have AAA ratings, but they’ve also grown their dividends for 20 years consistently every year.
And of those names two of them we own, Johnson & Johnson and Exxon. So I would say people should look at stocks, people should look at income, and I think people should look at security of income with a AAA rating and from my perspective I think those are two of the better names that are in the stock market.
CONSUELO MACK: And Mark, final question, is there anything that you are doing differently than Sir John would have done?
MARK HOLOWESKO: Yes, but I think that’s part of his approach. His approach was to always do things differently.
CONSUELO MACK: Improvise.
MARK HOLOWESKO: So I would say one of the main differences is that- Sir John used to take big currency bets. Obviously, when you invest in stocks all over the world you have a basket of currencies all over the world. He never hedged those currencies back to the dollar, but he would also take a strong view on a currency. I hedge a lot of currencies. I think currency risk today is very strong. I don’t want to assume a lot of that risk.
CONSUELO MACK: And on that note we will end this conversation.
Mark Holowesko, thank you so much. It was such a treat to have you on Wealth Track.
MARK HOLOWESKO: Well, it’s good to see you again.
CONSUELO MACK: And to share Sir John’s wisdom and also your own, which is considerable as well.
So thanks for being here.
MARK HOLOWESKO: Thank you.
CONSUELO MACK: I know Sir John is looking down at Mark Holowesko smiling and saying keep up the good work! At the conclusion 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 one of Mark and Sir John’s major themes: keep an open mind. The market is constantly changing. No one approach works all of the time. Sir John and Mark Holowesko are always looking at what the market is offering you. Mark’s comment that Sir John’s genius was the simplicity of his approach, always looking for what was cheapest in the markets. On a personal note, Sir John was one of my heroes, not for his financial skills which were phenomenal, but for his richness of spirit and endless capacity to learn and love. A truly remarkable man.
And that concludes this edition of WealthTrack. Next week is a national pledge week on public television, so many stations will not carry WealthTrack during their fund drives, but some will- including our presenting station WLIW-New York. We will revisit a fascinating discussion with Financial Thought Leader Michael Mauboussin, chief investment strategist of Legg Mason Capital Management who will explain why doing less in the markets can actually make you more!
For those of you who want to see our WealthTrack interviews ahead of the pack, including this week’s exclusive interview with Great Investor Mark Holowesko, subscribers can see our program 48 hours in advance as well as timely interviews exclusive to WealthTrack web subscribers. To sign up, go to our website, wealthtrack.com. Thank you for watching and make the week ahead a profitable and a productive one.
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