Winters Finds Road to Asia's Rising Wealth Runs Through Europe
David Winters likes to quote hockey great Wayne Gretzky, who said the key to success was skating to where the puck was going to be, not where it had been.
The puck has moved from the U.S. and Europe to the emerging economies of Asia, Winters said. The manager of a top-performing mutual fund during both halves of the past decade, Winters says he is seeking to profit from this “tectonic shift” after doubling the portion of non-U.S. stocks in his portfolio to about 70 percent and buying companies that can profit from Asia’s growth.
“I want my shareholders to have exposure to the parts of the world where people want everything we have and are willing to go out and get it,” Winters, who runs the $1.3 billion Wintergreen Fund from Mountain Lakes, New Jersey, said in a telephone interview.
Investors have poured a record amount of money into emerging-market equity funds this year to try to tap into the fast-growing economies of Asia and Latin America and their expanding ranks of consumers with rising incomes. While Asian stocks can be a vehicle for exploiting that continent’s wealth, buying European companies with a global reach is often a better way to achieve the same goal at a discount, according to Winters.
“When people hear ‘Europe’ they think Ireland and Greece,” David Herro, manager of the $6 billion Oakmark International Fund, said in a phone interview, referring to two countries whose financial woes have required bailouts. “That gives us a chance to purchase quality at a good price.”
Herro, who was named Morningstar’s international fund manager of the decade in January, said Vevey, Switzerland-based food producer Nestle SA and Geneva-based Compagnie Financiere Richemont SA, the world’s largest jewelry maker, have large and growing businesses in Asia.
Winters owns the same two stocks for the same reason. So does Thomas Russo, a partner at Lancaster, Pennsylvania-based Gardner Russo & Gardner, where he helps manage $3 billion.
“I’m getting meaningful emerging-market presence without paying emerging-market prices,” Russo said in a telephone interview. Legal protections for shareholders are also stronger for firms based in Western countries, he said.
The back-door approach to Asia may not produce the best results if emerging-market stocks do as well as some forecasters expect. Emerging-market equities will surge 57 percent in 2011 as economic growth and low interest rates drive valuations higher, UBS AG analysts wrote in a Nov. 29 report.
Investors willing to tolerate the swings that come with emerging-market stocks “will go for the pure play in the hope of getting higher returns,” Nicholas Smithie, co-author of the UBS report, said in a telephone interview. Smithie is an emerging-market strategist at the bank in New York.
Playing the ‘Trifecta’
The MSCI Emerging Markets Index traded at a price-earnings ratio of 14 on Nov. 30, according to data compiled by Bloomberg, compared with 11 for the Euro Stoxx 50 Index, which tracks the biggest European equities.
Winters, who owns more European than Asian stocks, said he doesn’t care where a company is based as long as it can deliver what he calls the “trifecta:” improving economics, management that is friendly to shareholders and an attractive price.
Winters, 48, is a disciple of the value investing school pioneered by Benjamin Graham and David Dodd, whose 1934 book “Security Analysis” made the case for buying securities selling at a discount. Berkshire Hathaway Inc. Chairman Warren Buffett was a student of Graham at New York’s Columbia University.
Winters spent 18 years at Mutual Series, a fund firm founded by value investor Max Heine. Winters had kept an article about Heine taped to the wall of his dorm room at Cornell University in Ithaca, New York, where he earned a bachelor’s degree in economics.
At Mutual, Winters worked under value investor Michael Price, who took over Heine Securities Corp. and then sold it to Franklin Resources Inc. of San Mateo, California, in 1996 for more than $600 million. Price is now managing partner of New York-based MFP Investors LLC.
Winters oversaw the Mutual Discovery Fund from 2000 to 2005 and outperformed 95 percent of rivals in the world stock category, according to data from Chicago-based Morningstar Inc. His successor fund, started in September 2005, returned 6.9 percent a year for the five years ended Dec. 1, also better than 95 percent of peers. Wintergreen has climbed 17 percent in 2010.
“We feel we are getting that good Ben Graham, Warren Buffett-type approach with him,” said Aron Huddleston, co- portfolio manager of the $162 million Lifetime Achievement Fund in Omaha, Nebraska, which owns shares in Wintergreen.
Winters said he has evolved as an investor. In the early days, he bought what Graham called “cigar butts,” broken-down companies that might have a puff or two of life left.
Now he buys higher-quality stocks he holds for years. Some investments, including Jardine Matheson Holdings Ltd., a Hong Kong-based company, have been in his portfolio since he opened Wintergreen, according to filings with the U.S. Securities and Exchange Commission.
Wintergreen’s turnover ratio -- a measure of how much the portfolio changes in a year -- is 11 percent, compared with the 96 percent average for all equity funds, according to Morningstar.
Buying firms with solid brands and financial strength is a better way to build wealth, and in the current market offers a chance to pick up bargains, Winters said.
“These days you can buy a Porsche for a used-car price,” he said.
Jeremy Grantham, chief investment strategist at Grantham, Mayo, Van Otterloo & Co. in Boston, said in his quarterly newsletters that companies with stable earnings and low debt are the best values in today’s market because they’ve been out of favor so long.
Winters has also changed as a global tactician. When he opened Wintergreen, the fund put about 35 percent of its assets in non-U.S. firms.
In the past few years, the U.S. “borrowed too much money and will take time to work through those problems,” he said. Asian countries learned lessons from the financial crisis of the late 1990s and boast stronger balance sheets than their Western counterparts, he said.
The U.S. economy will expand 2.5 percent in 2011, compared with 9 percent for China and 8.6 percent for India, according to the average forecast of economists surveyed by Bloomberg.
By investing outside the U.S., Winters will also be less tied to the dollar, which he said could lose value as a result of the country’s debt burden.
Streams of Cash
“We like to get streams of cash in multiple currencies,” he said.
Investors contributed $84.3 billion to emerging-market stock funds this year through Nov. 24, beating the old record of $83.3 billion added in 2009, according to Cambridge, Massachusetts-based research firm EPFR Global.
Jardine Matheson Holdings Ltd., Winters’s largest position as of June 30, owns car distributors, real estate, supermarkets and hotels in Asia. The Hong Kong-based firm was founded in 1832 by two Scottish traders and sent tea back to England two years later, according to its website.
Over the past 20 years, Jardine shares have returned an average of 17 percent annually, compared with 16 percent for Berkshire Hathaway, Winters’s second-largest holding.
Swatch Group AG, the world’s largest watchmaker, is benefiting from the rise of emerging economies. The portion of the Biel, Switzerland-based firm’s sales from Asia climbed to 44 percent last year from 32 percent in 2003, Bloomberg data show.
Winters admires the consistency of the watch industry.
No New Gizmos
“We like businesses that involve simple repeat human behavior,” he said. “It means the company doesn’t have to come up with a new gizmo every six months.”
Watches appeal to men and women alike, and human adornment isn’t about to go out of style, Winters said. Swatch’s brands include Omega and Breguet as well as the namesake line.
“In emerging countries, when people finally get enough money to start purchasing products, the first things they buy are brands that are associated with the affluent,” said Russo, who owns a small position in Swatch.
Swatch, Winters’s third-largest holding, has gained about 60 percent this year.
When Winters spoke to a business school class in March, he handed out Nestle chocolate bars to the students.
“Kids in the future will still like them,” he told the class at the Richard Ivey School of Business at the University of Western Ontario in London, Ontario.
Over the decades, the price of the bars has increased from about 20 cents to $2 even as their size has shrunk, Winters said.
“We love their pricing power,” he said of Nestle, whose shares gained 11 percent this year.
Nestle’s emerging-market sales grew 11 percent in the first nine months, compared with 6.1 percent for overall revenue, the company reported in October.
Schindler Holding AG, the world’s second-largest elevator maker, is another of Winters’s European stocks with an Asian presence. The Hergiswil, Switzerland-based company said in August that it was providing 157 escalators for Beijing’s subway and 124 for a Chinese shopping mall. The company forecast strong markets in China and India for the second half.
Winters called Schindler a play on urbanization in China and the rest of Asia.
“It’s a great business today,” he said. “It has the potential to be an even better business tomorrow.”
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