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Wintergreen: Name-Brand Global Franchises, Discount Prices

We continue to see well-run companies with meaningful exposure to the growing markets of Asia, South America, and Africa selling for attractive valuations, says Wintergreen's David Winters.

Liana Madura, 11/18/2011

David Winters, CFA, managing director, and portfolio manager of Wintergreen Advisers, LLC, recently answered our questions about Wintergreen Fund WGRNX, including where he's been finding the best values today and how emerging markets can continue to grow despite the current slowdown facing developed economies. He also discussed the challenges facing communications and tech firms, and weighed in on Berkshire's buybacks.

1. What impact do you think the European sovereign debt crisis will have on individual European firms? Have you changed your strategy at all because of debt concerns?
The sovereign debt crisis and accompanying austerity plans will certainly have a negative impact on consumers and businesses in Europe in the coming months and years as those governments work through their debt and banking issues. However, Wintergreen's investments in Europe are primarily global businesses that are domiciled in Switzerland; the fund has very little direct exposure to EU countries. Switzerland has an independent currency and will not be directly involved with the EU debt crisis. Switzerland's economy and many of its constituent global businesses are doing very well.

2. Where are you finding the best values today?
Over the past few years, volatile stock markets have presented us with many opportunities to buy name-brand companies with growing global franchises at what we believe are very compelling prices. We continue to see well-run companies with meaningful exposure to the growing markets of Asia, South America, and Africa selling for attractive valuations. Many of these companies are based in Western countries with Western-style management and well-established rule of law and accounting standards, but they derive a meaningful amount of business from the growing economies of the developing world. Buying companies with these qualities at rock-bottom prices in the panic of 2008 and 2009 led the fund to strong returns in the past two and a half years. Although we clearly are making no guarantees, we believe that being a prudent buyer in the recent volatile market sets up the fund well for the coming years.

3. Do you think that emerging markets can keep growing in the face of an apparent slowdown in developed country growth?
It used to be the case that when the U.S. and Europe sneezed, the rest of the world caught a cold. The world has changed during the past decade to a great extent, and now many of the emerging markets have economies fairly balanced between exports and domestic consumption. The citizens of China, India, Brazil, and Singapore are much wealthier today than they were a decade ago, and they are using a significant portion of their new-found disposable income to consume more goods and services. Consumerism should allow these economies to have satisfying rates of growth even if Western economies face more difficult economic prospects. We've witnessed this transformation in China, where GDP continues to grow at around 9% even as the U.S. and Europe have struggled to avoid economic contraction.

4. You are underweight in the technology and communication sectors. Why have you steered clear of these areas?
Both technology and communications are industries characterized by constant change and immense competition. It is difficult to know which companies will survive, much less thrive, in a constantly evolving industry with low barriers to entry. We prefer to own companies such as Swatch SWGAY and Richemont CFR, whose watch and jewelry businesses are timeless and not impacted by the forces of technological change. We have a high degree of confidence that their businesses will be stronger than ever five years from now; the same cannot be said for many technology or communications companies.

Having said that, the fund does own shares in MasterCard MA. MasterCard runs an electronic payments network, which we believe provides the company with a sustainable competitive advantage because of its high barriers to entry. The business generates significant cash flow, which MasterCard has been able to reinvest at a high rate of return. As communications and payments technology evolve, we believe MasterCard will continue to be a leader in payment technologies.

The fund also owns shares in Google GOOG. Google's business model is simple, but we believe its scale and balance-sheet strength provides it with a significant competitive advantage over its competitors. Management has been able to grow the business at an impressive rate while using very little leverage, which is an attribute we at Wintergreen look for in all our investments.

5. Does Buffett's decision to buy back shares of Berkshire alter your view of the firm, or do you see buybacks as a prudent use of capital?
We see the buyback as a clear signal that one of the greatest investors of all time views his own stock as extremely undervalued. Deploying billions of Berkshire Hathaway's BRK.A dollars in cash at a high rate of return has become more difficult as the company has grown, but it could easily repurchase billions of dollars' worth of its own stock. If the stock is as undervalued as Buffett believes it to be, a buyback of this size could significantly accrete value for Berkshire's remaining shareholders. We love owning businesses that can recycle their cash back into their business at attractive rates of return, but sometimes the best use of that capital is buying the company's own undervalued shares. With nearly $50 billion in cash on the balance sheet, Berkshire has plenty of cash with which to buy back its shares, purchase other securities, make acquisitions, and meet insurance claims. Wintergreen sees this as prudent and shareholder-friendly activity.

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Liana Madura is an assistant site editor with Morningstar.com
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