A Global Value Investor On An American Shopping Spree
Portfolio Manager Mark Holowesko calls his Franklin Resources' Templeton Growth Fund the "anti-Nasdaq" fund, and for good reason. His $15 billion fund doesn't own a single Nasdaq-listed stock right now, nor has it for several years. That has hurt Templeton Growth's performance recently. But since the Nasdaq market peaked on Mar. 10, Templeton Growth shares have jumped 11%. Why? Holowesko, a quintessential value investor, is seeing his bets on cheap stocks finally pay off--and he is buying even more.
And Holowesko, of late, has been pulling back in Asia, Europe, and Mexico to load up on bargain-priced U.S. paper, steel, food, financial, and retailing issues. "I don't have a clue where the market is going," says Holowesko, 40, who oversees $90 billion in assets worldwide, including the 47-year-old Templeton Growth. "I just know these are cheap stocks."
Holowesko's return to the U.S. is in sharp contrast to 1999, when he was shunning America. But after watching two-thirds of the stocks in the Dow Jones industrial average and Standard & Poor's 500-stock index plummet in value earlier this year, Holowesko has nearly doubled his stake in the U.S., to 39% of his fund's total assets, in about two months. Relative to stocks in Europe and Asia, he argues that American equities are cheap when valued by free cash flow, assets, dividend yields, or earnings.
SCREAMING BARGAIN. Half of the 200-stock portfolio's top 10 holdings (table, page 154) are now in the U.S., a sharp contrast to last December, when no American companies made the list. His largest holding: H.J. Heinz, which Holowesko thinks is a screaming bargain. The Pittsburgh-based food maker boasts a robust stock buyback plan, plenty of free cash for acquisitions, and a healthy 3.5% dividend that has been growing 8% a year. Holowesko started buying the stock in February at 36. It's now around 41. But based on the valuation set by Unilever Group's recent bid for Bestfoods, Heinz should be trading around 60, Holowesko thinks. He finds similar value in Bank of America, which, at 52, is some $24 off its 52-week high. With a price-to-book value of 1.8, he thinks the bank is selling for nearly half the value of other financial-services stocks. It also has less exposure to the securities industry than competitors, and could be less affected if the market slumps.
Holowesko has also taken smaller stakes in other U.S. companies, such as Nabisco, Waste Management, J.C. Penney, and Albertson's. Assuming such stocks "move on rational estimates of companies' assets and future growth," he says, "patient, long-term investors" will reap rewards. "Value stocks have had their bear market," he says.
If that turns out to be the case, Holowesko will be well set for further gains. In the face of triple-digit price-earnings ratios for tech stocks and blue chips with earnings multiples in the 40s, Holowesko has kept the average p-e of Templeton Growth to 14.5. That's half the p-e of its benchmark, the Morgan Stanley Capital International World Index, and a sliver of the Nasdaq Composite's 159.
The steadfast focus on value during the momentum investing era has dampened Templeton Growth's performance for the past three and five years, ranking it in the bottom quartile of funds tracked by Morningstar. The fund has also trailed the S&P by an average of 11 percentage points annually in both periods.
Holowesko couldn't care less if the tech bonanza passed him by. He is taking his cues from his conservative mentor, esteemed stock-picker Sir John Templeton, who bequeathed the fund to Holowesko, then 27, back in 1987. Right now, says the 87-year-old Sir John, who shares office space with the Bahamian-born Holowesko in his native Nassau, we are in "the most dangerous time in financial history." Investors, says Templeton, are witnessing "the greatest financial bubble of all times. It's perfectly true that the Web and these remarkable computers make the world a far better place. We should be overwhelmingly thankful. But stay away from the price of those stocks." Adds Holowesko, who joined Templeton Funds in 1985: "Bubbles don't deflate. They burst."
POUNCING ALONE. Reflecting those feelings, Holowesko has less than 2% of Templeton Growth in technology issues today. But even with the fund's recent gains, Templeton Growth remains loaded with value stocks that have yet to pay off. Fully one-third of the stocks in Templeton Growth "don't work," Holowesko admits. His loser investments include Lockheed Martin, Safeway Stores, Allstate, Occidental Petroleum, and Compaq Computer, but the bulk of the fund's worst performers are in Britain, where about 12% of the fund's assets are invested. Holowesko is biding his time with retailer Marks & Spencer, which trades for less than the value of its real estate assets alone. He originally pegged it as a takeover target, but no one has pounced.
In scrutinizing the U.S. stock market, Holowesko likes to look back to the booming Japanese economy of more than a decade ago, which finally collapsed under the weight of an overvalued currency, weak banking system, and stock and real estate markets gone haywire. That doesn't appear to be America's fate, Holowesko maintains, because the country's asset bubble is hardly as widespread as Japan's. True, high tech "went way beyond what's reasonable," he says. "But it's still only a narrow part of the market."
Extravagant tech-stock valuations will have to be paid for ultimately, he adds. That may be, but as long as Holowesko keeps his focus on bargain buys, this won't be something that Templeton Growth Fund investors have to worry about.