David Winters: A Different Drummer

Orignally aired March 28, 2014

CONSUELO MACK: This week on WealthTrack…How do you hit the investment jack pot? Wintergreen fund’s David Winters explains his trifecta formula of buying companies with growing earnings, shareholder friendly managements and low prices. Great Investor David Winters is next on Consuelo Mack WealthTrack.

Hello and welcome to this edition of WealthTrack, I’m Consuelo Mack. Those of you who are regular viewers know that more often than not our guests march to the beat of a different drummer. No matter what the economic, or market climate they each have their own distinctive and disciplined investment approach from which they do not deviate. Their consistent research and analytical skills might lead them to different types of investments and securities over the years but how they get there does not change.

As you will discover in a moment this week’s guest is a prime example. So what tunes have the Wall Street crowd been playing? Here are a few current commonly heard themes: If you must be in the stock market, and many investors are not convinced you should in any size, the U.S. Stock market is the best place to invest. The expression I have heard many times is the “U.S market is the cleanest shirt in a dirty laundry”. Growth and momentum are in… hence the popularity of social media stocks. Value and quality are out, which is why many blue chip stocks have languished. Emerging markets are the worst place to invest. Well these are not the sentiments of this week’s guest. As a matter of fact he is on the opposite side of these popular themes. He is David Winters, portfolio manager of the value oriented Wintergreen Fund which he founded in 2005 with the flexibility to invest like a hedge fund. It can go anywhere around the globe and invest in just about any asset class including distressed securities and arbitrage. Winters was nominated for Morningstar’s international stock fund manager of the year award in both 2011 and 2010.

When I taped the interview with noted value investor, David Winters he spoke of his sizable position in Coca Cola because of its improving business, cheap stock, and shareholder friendly dividend and stock buyback programs. This week however Winters turned from a management fan to a critic over the company’s proposed 2014 executive compensation plan and publically complained to Coke’s board and largest shareholder, Warren Buffet’s Berkshire Hathaway.

DAVID WINTERS: The Coca Cola company with this new plan is suggesting to shareholders, soliciting their vote, that 24 billion dollars over the next four years is an appropriate level of compensation to transfer from the shareholders’ pockets to management. $24 billion is a lot of money! $24 billion is a lot of money by anybody’s standards.

CONSUELO MACK: Coke disagrees with Winters’ analysis and says it is “misinformed and does not reflect the facts.” We’ll have links with more in-depth information on our website, wealthtrack.com Now Wintergreen is one of WealthTrack’s sponsors but his track record speaks for itself. I began the interview by asking him why his focus continues to be overseas considering the U.S. Market’s strong showing.

DAVID WINTERS: We believe looking forward that the great opportunities are beyond the United States borders. There’s great investments here in the U.S., but if you expand your view to the world, there’s all kinds of gems out there, and they’re neglected today because people are basically focused on the U.S. and what’s happening here.

CONSUELO MACK: One of the interesting things is that when you look at what markets have been very popular and what markets have been unpopular, at one point three or four years ago, the emerging markets were just… everybody wanted to be in emerging markets. Nobody wanted to be in the developed markets. So what does that tell you about market sentiment now, the fact that no one wants to be in the emerging markets?

DAVID WINTERS: Well, market sentiment often creates opportunities for value, and we think the value today is in companies that are busy looking for opportunities overseas. You’ve got economies that still are growing faster than the west, and the sentiment is so negative about the global markets that we think it’s a great time to go fishing for value.

CONSUELO MACK: Another part of the Wintergreen kind of culture is in not being an index, is the fact that you also decide not only where you want to invest but where you don’t want to invest, and so one of the things that you told me recently, which I did not realize, is that you don’t invest typically in companies that are based in the European Union. Why are you boycotting the EU? Why are you boycotting companies that are based in France and Germany, for instance?

DAVID WINTERS: Look. We love the EU. It’s really a question about valuation and the backdrop of where you can find the best opportunities. The EU is growing very slowly. It’s recovering from its debt crisis, again very slowly, so if we can find better opportunities with our capital, because our idea is not to mimic an index but to create an investment opportunity which has less risk, lots of upside, and most people are just mimicking the index, so they buy the EU.

CONSUELO MACK: How important is it where a company is domiciled, where it is based?

DAVID WINTERS: We are very interested in things like rule of law, Consuelo, and that we can invest in a country and know that they’re going to treat us fairly, and so we like countries which have a shareholder-oriented culture, the United States, Canada, Switzerland, Singapore and so on, because we really want to be careful with people’s hard earned money, and the domicile really matters.

CONSUELO MACK: When you look at the bureaucracy that is the EU, is that a negative as far as you’re concerned?

DAVID WINTERS: We just think it’s a harder place to do business, and that doesn’t mean that we won’t find a fabulous gem in the EU tomorrow, but we can find better gems in little Switzerland, the wonderful little Switzerland or in other places in the world and, again, our idea at Wintergreen is to stack the deck, really stack it in the investor’s favor and not just try to do what everyone else is doing.

CONSUELO MACK: Let me ask you about the big picture before we again delve into what you’re specifically doing at Wintergreen. We are five years into a bull market. The S&P had the best year since 1997 last year, and in your shareholder letter, the 2013 shareholder letter, you pointed out that the top 10 best performing S&P stocks in 2013 had average P/E multiples of 58. What does that tell you about the valuations in the market right now?

DAVID WINTERS: Well, the interesting thing, Consuelo, that’s happened is a lot of the most recent part of the bull market has been in the most fluffy speculative names, and it’s left behind all kinds of companies that aren’t that exciting to people, and that’s where we like to find deals. The other thing is that the bull market is coming off a crash bottom, so it’s really only now that business is beginning to return to normal, that people are confident again. So we think it’s a great time to be a long-term investor, especially if you’re not doing what everyone else is doing.

CONSUELO MACK: Are you confident about the strength of the global recovery that we’ve seen?

DAVID WINTERS: I think the U.S. will be fine. I think we’re on our way. We got our problems. We’re a great country. Canada’s fine. I think Western Europe will grow slowly. We think Asia, despite all the concerns, you got a couple billion people who want what we have, and they’re going to work hard to get it.

CONSUELO MACK: I always ask you when you’re on WealthTrack about the fact that you look for companies that have a trifecta, and so remind us again of what that trifecta is.

DAVID WINTERS: The trifecta at Wintergreen is, first of all, you want to buy companies that have good or improving economics, so they’re getting better. Secondly, you got have management that’s working with all the shareholders, not just to put money in their pocket and, thirdly, a low price. This idea that has become prevalent that you can trade your way to wealth by watching television and buying and selling doesn’t work.

CONSUELO MACK: So the momentum players that are very much followed, high-frequency traders, you don’t think that that is an effective long-term strategy.

DAVID WINTERS: Everybody I know who’s really rich got there by investing thoughtfully over the long term, staying with a sensible investment program, and that’s our idea to do at Wintergreen. We have all our own money up. The people we care about have their money up, so we view every dollar is precious, and we want to be very careful with people’s money, and it’s this idea that if you don’t lose … you’re going to have fluctuations … and you focus on the long term, that you can really get wealthy over time.

CONSUELO MACK: One of the things that you mentioned in your annual letter as well is the fact that instead of just looking at the stock price, which you do … I mean, obviously value matters a lot, but the performance of the stock price, you are looking at these companies on a total return basis as well.

DAVID WINTERS: This idea that you can outperform every day or every month of every year, it’s not realistic, but over time you can outperform, and I think it’s possible, and by buying assets especially today you can buy quality, real quality at big discounts, and if you’re patient which is in short supply these days, I think you can do very handsomely.

CONSUELO MACK: You recently bought … I mean, this was last year … a Hong Kong property developer, I guess the largest Hong Kong property developer and landlord in Hong Kong called Sun Hung Kai Properites. How does that fit into your trifecta approach?

DAVID WINTERS: Well, I have a fair amount of experience of investing in distressed assets, and it’s become harder to find bonds that make the criteria, but here was an equity of a company that used to be considered the best, a premium, that due to a variety of factors, some self-imposed, has gone to a big discount, and we’ve gone to look at their major properties, and they’re first class, and we visited with the company. So you have, even though they’re under a cloud, the management is trying to make sure they fix this. You’ve got more people who want to live in Hong Kong, Shanghai and other parts of China than they can supply first-class property to, and it trades at a big discount. So, you know, we are willing to … one of the beauties of the way we set up Wintergreen is we can do all kinds of different things. We call it the ABCs, activism, arbitrage, bankruptcies, cash and distress, and every now and then in our tool bag, Consuelo, something will come along and we go, “Ah-ha, we can make money with very little risk and good up side.”

CONSUELO MACK: You recently have done some things, speaking of your tool bag, that I’m intrigued by, and one of them was that you bought long-dated call options on Nestlé. Nestlé is a big holding of yours. Why buy the call options?

DAVID WINTERS: Nestlé is a fabulous company. They make products that people love around the world, but Nestlé went from a darling to being a company that people didn’t like as much because it has big emerging markets exposure or investments, and it’s just growing not quite as fast, and so it falls out of the markets’ love, and so we realized that you could buy these options and that they essentially would give us an amplified return, a greater return on the same underlying and that the derivatives, which is what they are, were undervalued. And so the thing for us at Wintergreen is we are willing to look for different types of opportunities that, if they come along, we’re prepared to do it.

CONSUELO MACK: You are a low-risk investor. Options are considered on the face of them to be more risky than owning the common stock.

DAVID WINTERS: It is more risky, but we’re not only … there’s times where even if it’s a little more risk and it’s a lot more return which is what we believe in the long-dated Nestlé call options, then we can own some of those, too, and put them in the mix, and in the portfolio we think that Nestlé will do well, and the likelihood is that these options will do well because the sentiment has become so powerful and the way that people think, that if you can take advantage of people’s negativity and still do the analysis, you take a lot of risk out.

CONSUELO MACK: Another strategy that you employed last year was that you participated in an arbitrage situation where Berkshire Hathaway was taking over NV Energy, and so you arbitraged that. Again, thinking of what I know about David Winters and the Wintergreen Fund, you had kind of a hedge fund type of past, but you’re doing this kind of thing in the Wintergreen Fund as well. Why? Why take that chance? It’s an arbitrage. It might not work out at all. It did, but it might not have.

DAVID WINTERS: Well, in this case, again we have the skill set, and we wait for the perfect pitch, and here was a perfect pitch where you had a very good acquirer with a great record with cash.

CONSUELO MACK: Berkshire. DAVID WINTERS: Berkshire Hathaway. CONSUELO MACK: A major holding of yours.

DAVID WINTERS: So the likelihood is they would close, and we figured out that this was still trading at a discount, and in cash you get paid 15 basis points. So we could put cash to work in NVE, and I think to close we made two and a half percent. That may not seem very exciting compared to the S&P, but it was a lot better than having cash just sitting there earning 15 basis points. If you annualized the return, because it closed early, it was a five percent rate of return, and so, Consuelo, we have this flexibility, this intellectual flexibility to look for where the value is, where securities are miss-priced, where the odds are in the shareholder’s favor that we can make investments that can protect us on the down side and create upside and markets change, and the thing to do is to be able to be receptive and have the ability to capitalize on opportunities that markets give you.

CONSUELO MACK: You mentioned distressed investing which you do have a very successful history in. What else is distressed, looking around the world?

DAVID WINTERS: Well, I think the biggest thing that’s distressed these days is long-term investing because essentially you’ve got this bifurcation into this short-term “I want to get rich instantaneously” to this “I’m going to do dynamic allocation between ETFs”. It doesn’t work. The way to get wealthy … and again, everyone I know who’s done well it’s been through living below your means, saving your money, investing it wisely and staying with the program. Understanding what you’re doing with your money.

CONSUELO MACK: So long-term value investing is a distressed sector right now. DAVID WINTERS: I think so. CONSUELO MACK: You’ve talked about Nestlé. What about Berkshire Hathaway?

DAVID WINTERS: Berkshire Hathaway is a gigantic company today, and it’s been enormously successful because it’s effectively a company with non-callable capital, and the cash just comes in every day, and it’s changing. It’s now really the Burlington Northern Sante Fe, it’s utilities, it’s insurance. And we think it’ll do fine, but the future can’t be as good as the past just because of the size, but it’s a very low-risk situation, but you have ultimately a transition of management and how that’s going to play out ,and it should trade at a discount because it’s a conglomerate. We like Berkshire.

CONSUELO MACK:So are you going to continue to hold Berkshire, and would there be any reason because you have traded in and out of Berkshire over the years. Is there any reason as the size of the company starts to impede its future performance? Is there any reason not to own Berkshire or own less of it? How do you decide when to buy or when to sell or when to reduce a position or when to add to a position?

DAVID WINTERS: Well, Berkshire like anything has got a value, and if you step back from the emotions of it all and you calculate what you think the pieces are worth, and in this case there’s almost no debt so it’s cash, and you divide by the shares outstanding you come up with NAV, and there’s times that Berkshire has gone close to NAV or through NAV, and it’s at those times we’re more likely to be a seller.

CONSUELO MACK: Where is it now as far as net asset value?

DAVID WINTERS: We think it’s probably a 25 percent discount, 20 percent discount, and it should trade at some sort of a discount. So when it gets expensive, we take some money off the table, and then today we’d say Mr. or Ms. Market or Mrs. Market, Miss Market has swings, and so Berkshire can go to a discount. It was only, I don’t know, a year ago Berkshire went to a really big discount, and they announced a big buyback. Fortunately we were buying shares before they announced, so I think with all these companies you have to keep your pencil sharp, and you have to be a buyer when markets are handing you the deal, and you have to be willing to sell into strength when that makes sense as well.

CONSUELO MACK: When we see that your turnover is so low, and it has been since the beginning … it’s under 20 percent. Is it 14 percent turnover a year? And yet last year you sold two big holdings that we have talked about in the past and one was Schindler Holdings which every elevator I go into I always look to see if it was a Schindler elevator, and the other one was Imperial Tobacco. Why did you sell those two after holding them for so long?

DAVID WINTERS: We think they’re both fine companies, but our job at Wintergreen, one part of our job is to assess where are the best opportunities, and we try to see if a company that we own if the economics or the dynamics have changed and if we have a better idea, and what we want to do is to make sure that we’re diligently working for the shareholders. At times it makes sense to take money off the table, either keep it in cash, or there’s something else to do that’s even better, because ultimately my responsibility is to compound our shareholders’ capital with less risk, good returns, and the world changes, and we want to be there to pick up those gems on the beach.

CONSUELO MACK: One of the issues that some viewers have raised with us is they listen to you on WealthTrack and elsewhere and they say, “We really are intrigued by what Wintergreen’s doing. We like his approach, but why are his expenses so high?” and Morningstar says that 95 percent of no-load funds, you are more expensive than 95 percent of no-load funds with a 1.8 percent expense ratio.

Why?

DAVID WINTERS: Well, basically we have the original investor class, and we have an institutional class which has a lower expense ratio.

CONSUELO MACK:One point four percent. DAVID WINTERS: Yeah, so … CONSUELO MACK: Still high according to Morningstar for institutions.

DAVID WINTERS: But the thing is, we’re actually doing the work. The thing at Wintergreen is we do all these different types of securities. Most funds today, Consuelo, have become little more than index fund mimickers, and Wintergreen is anything but that as we talked about before, and to do the work and do the work properly is not cheap, and I think one of the fallacies is it’s whether you’re going to a doctor or your money doctor you don’t want to necessarily go for the cheapest alternative. You want to go for the best, and I think that what we do works. We’ve been able to have many shareholders who’ve been with us since the beginning, and people can stay with the program, and this idea that you can trade in and out or buy the cheapest … and I think the institutional share class addressed that issue.

CONSUELO MACK: One investment for a long-term diversified portfolio. What would you have all of us own some of?

DAVID WINTERS: I think there’s a company in Canada called Canadian Natural Resources, and it’s an oil and gas company, and it started from very humble beginnings. We’ve studied every oil company and gas company in the world, and CNQ is just a gem. Not only does it continue to trade at a big discount to NAV, but they keep growing the NAV, and the company is domiciled in Calgary in Alberta, and we love Canada. I love Canada. I think Canada’s a fabulous country. They have rule of law. They’ve really done a lot right and CNQ. You know, oil will fluctuate, but we still are in a society that’s based on oil, and I think they meet the trifecta. They have good or improving economics. They have management that works for all shareholders. They own a lot of stock, and then thirdly we think the stock price is very cheap and so we own a lot of CNQ, and we think the future is bright for the company and we’re enthusiastic.

CONSUELO MACK: Cash position now is what at Wintergreen? DAVID WINTERS: It’s probably five percent. CONSUELO MACK: That’s low.

DAVID WINTERS: Yeah, we can find so much to do. I think there is so much that’s undervalued, because the world has gone to this I’m chasing what’s in the news today. I’m going to try to trade my way to wealth which usually means they get financially soaked, and I feel like a kid in a candy store with 100 bucks in my pocket. There’s just so much to do.

CONSUELO MACK: That’s such a refreshing attitude, and you’re always optimistic about investing, David Winters, always a treat to have you on WealthTrack. Thanks so much.

DAVID WINTERS: Great to see you, Consuelo. CONSUELO MACK: At the close of every WealthTrack we try to give you one suggestion to help

you build and protect your wealth over the long term.

In this week’s action point we are taking our cue from David Winters’ comment that the most distressed investment these days is long-term investing. This week’s action point is stick with investors and companies that are built to last. Winters and other guests, Ed Perks, Wally Weitz and Tom Russo come to mind most recently, all think long-term and look for companies with businesses and corporate cultures that think in years, not months and are managed to grow and last for generations of customers and shareholders. These money managers also tend to invest in businesses for years. Yes they trim or add to their positions to take advantage of price fluctuations, but they see themselves as owners as well. I for one want to invest with funds that intend to last.

Next week we will sit down with two of the top personal finance journalists in the country. Jonathan Clements and Jason Zweig will discuss the greatest financial challenges facing individuals and how to overcome them.

Also we want to alert you to a new feature we will soon be introducing on our website. It’s called “WealthTrack women”, investment pros who specialize in advising women clients will answer questions vital to their financial health.

In the meantime have a great weekend and make the week ahead a profitable and a productive one.