Tapping New Riches In The Old WorldStanley Reed
In a modest office overlooking a London church designed by Sir Christopher Wren sits an ascetic-looking man who is one of the world's biggest buyers of European stocks. His name is Robert Friedman. For the past two years, he has been on a shopping spree for Michael Price's Franklin Mutual Advisers funds.
Price, a legendary value investor, is best known for challenging such underperforming U.S. corporations as Chase Manhattan and Dow Jones to restructure their operations and boost share prices. Friedman, in turn, has gone in search of European underperformers that meet Price's criterion: companies that trade for 40% less than what he defines as their true value. With many European industries ripe for restructuring, Friedman, a 38-year-old graduate of Johns Hopkins University and the Wharton School, has had no trouble finding cheap stocks. Since arriving in London two years ago, Mutual's European equity holdings have jumped from $3 billion to about $6 billion. Europe now accounts for about 25% of Mutual's $28 billion under management.
Friedman's stock picks powered Mutual European Fund, founded in 1996, to a 22.7% total return last year. Meanwhile, Mutual Discovery, which is about 45% invested in small and midsize European companies, turned in a 22.5% gain. Price's other funds--Mutual Beacon, Mutual Shares, and Mutual Qualified--also have substantial European holdings. While many U.S. investors in Europe have seen the rising dollar erode the value of their offshore holdings, Friedman has hedged his portfolios against the greenback's recent gains.
Some of Friedman's biggest successes have occurred among large-cap issues. Mutual made a killing in Philips, for example, after two successive chief executives slashed costs and sold businesses. Friedman sold some of the stock for $80, double what Mutual paid, and says he may go back in again now that Philips has dropped to $61 1/2.
Another Friedman favorite is Investor, the holding company of Sweden's Wallenberg family. When Mutual first bought into Investor in 1995, it was trading at a 50% discount to the value of its underlying portfolio. The stock has more than doubled, thanks to restructuring. And he still thinks Elf Aquitaine, the French oil giant, has room to rise despite weak crude prices. But with European bourses up 35% last year, Friedman is getting worried about a sharp correction among big-cap stocks. So he's turning his gaze toward smaller companies, such as British chemical maker Laporte and insurer Guardian Royal Exchange.
Mutual has also plunged into bankruptcies in a big way. It owns 25% of London's Canary Wharf development, which it acquired in bankruptcy for about $160 million in 1995. With London real estate booming, that stake has appreciated substantially. Mutual owns about $150 million in Eurotunnel bank debt as well; its value has risen roughly 60% in a year and a half.
Mutual has yet to take the confrontational approach to European companies that it pursues in the U.S. Friedman worries that Price's in-your-face tactics might backfire in Europe, where, outside of Britain, shareholders have fewer rights. His patience was recently tested by the recent acquisition of French insurer AGF Assurances by Germany's Allianz for $53 a share. Mutual has a big position in AGF, and Friedman thinks the price should have been about $60.
BUBBLE-WARY. With Europe furnishing Friedman with such fertile territory, Price has so far skirted Asian markets--despite their huge declines. The group holds less than $30 million worth of Asian stocks: Friedman says the group always figured that Japan was too expensive and that Hong Kong looked like a bubble. Even though Mutual is now checking out Asia for bargains, Friedman doubts it would shift more than 5% of its assets there.
While Friedman recently moved his home base of operations back to Price's Short Hills (N.J.) headquarters, he still plans monthly forays to Europe. And he'll have little trouble staying in touch from the Garden State, either. Three or four years ago, Friedman observes, European brokers and analysts moaned at the thought of crossing the Hudson River. Now, they beat a path to Mutual's offices. They know that there's big money in those Jersey hills.