Wed, 2 Jan 2013
Janus Overseas manager Brent Lynn says investor risk aversion significantly weakened his fund's performance in the past two years, and he also details opportunities for his top holdings.
Greg Carlson: Hi, I am Greg Carlson, and I am fund analyst for Morningstar. I am joined today by Brent Lynn, the manager of Janus Overseas.
Thanks for joining us today.
Brent Lynn: Thank you.
Carlson: I want to preface the first question with a little overview of the fund. You've managed it on your own since mid-2003. It has an excellent long-term record over that span, but the fund has had some very poor short-term performance in 2011 and 2012. I thought we might start, Brent, by just talking about the sources of that underperformance and then we can maybe touch on a couple of current holdings.
Lynn: Great. Well, thank you very much. If I were to say one thing to my fundholders, it would be to apologize for the very poor performance of the fund over the past two years. And this is not the performance that I expected myself and not the performance that I believe my fundholders deserve. That being said, I believe that there is cause of optimism on a longer-term basis.
Let me try to address what happened. I believe that the core source of underperformance for the fund has been that the style of the fund--which is a very contrarian-oriented style where we're willing to invest for the long term in stocks that we believe are truly misunderstood and misperceived in emerging markets, in financials, in cyclical, in sectors that have been beaten up--just has not worked in this market environment, which I believe has been an environment that has primarily rewarded defensive-oriented stocks, stocks in sectors where the visibility of the business and the earnings in cash flows on a shorter-term basis is much clearer and where there has been much less attention to valuation and also, I believe, less attention on sort of a longer-term growth.
I believe that the key reason for this defensive-oriented market environment has been that there has been huge risk aversion on a global basis because of all the political uncertainty over the past few years. Political uncertainty relating to the spike in oil prices starting from last year, related to all of the fiscal disagreements here in the United States, related to just the problems in Europe, the sovereign debt problems that seem to recur and recur and recur. So, I believe that once we can have a little bit more visibility in some of these macro areas that there will be a reduction in risk aversion in the markets and hopefully, at that point the performance of the fund can improve.
Carlson: As you mentioned, there have been some cyclically oriented businesses within the fund. Obviously, it has a large emerging-markets stake, but even within those markets, it's had some of the more cyclically exposed firms.
Carlson: Can you talk a little bit about Reliance Industries, which I know is a very long-term holding in the funds?
Lynn: Yes. Reliance is the big conglomerate in India, and they are one of the global leaders in refining. They have a very large petrochemical business, and they also have a very exciting growth potential in their E&P business offshore the east coast of India. Reliance has been a very long-term holding in the fund. In fact we've held it in the fund for over 10 years now. We believe that this company has been a consistent value creator over time.
So this is a company that thinks big. They built the world's largest grassroots refinery complex from nothing. This is a company that from scratch, and as a late entrant, built the number-two cellular operator in the world. We believe that they have the opportunity to build a major oil and gas business, and in addition, build a very large retail business in India and perhaps make some exciting forays into the telecom sector next year.
Carlson: Where does that sit from a valuation standpoint?
Lynn: Yeah, the valuation of Reliance we think is extremely attractive because here is a company where--you need to look at this on, I think, on a sum-of-the-parts basis--but if you look at their core petrochemical business and their core refining business, just that element alone accounts for most of the market value of the company. Yet this gives almost no value to the sort of huge upside in the E&P business. BP last year paid $7 billion for about a third of that E&P business showing that there is significant value here. It also gives very little value to the retail and telecom optionality that we think Reliance has.
Carlson: And the energy portion of the business has been affected by issues within the Indian government?
Lynn: Yes. So, unfortunately, for Reliance in order to realize some of the value in their energy business, they need to come to an agreement about long-term gas pricing with the government. And for various political reasons, this has taken much longer than we or the company expected, and this has resulted in project delays and delays in exploration and just sort of seeing what the potential is. But we believe that hopefully over the course of the next number of months or next year that this issue can be resolved and the company can move forward in this business.
Carlson: Also touch on Li & Fung. You've held that for a number of years; that's been a difficult stock. It's a logistics firm based in Hong Kong, but obviously they have a very global business.
Lynn: Yes. Li & Fung is another company that we have owned for a long time and have had a strong belief in this company. They are the world's leader in what I call outsourcing logistics for retailers. So when retailers need to source, maybe it's a shirt or other clothing or toys or various goods, they go to Li & Fung. Li & Fung has relationships with literally thousands of factories around the world, and Li & Fung can source these products cheaper, more effectively than these companies can do themselves.
Li & Fung, we believe, has the potential to be a strong grower for many years and has sort of option upside from a joint venture with Wal-Mart which could be potentially very large. They've option upside from a portfolio of brands that they have bought over the past few years, and can offer to retailers attractive exclusive brands and also option upside from expansion in Asia. We believe that investor skepticism about the stock over the past year or two perhaps is misplaced because the company, though it's faced a few short-term hiccups, the long-term opportunities remain very strong.
Carlson: Some of those hiccups have been in the relationship with Wal-Mart, correct? Can you expand on that?
Lynn: Yeah, the relationship with Wal-Mart, the potential for this relationship remains very, very large, but the pace at which they have been able to grow that business, I think, has been a bit disappointing on a shorter-term basis. They've renegotiated their agreement with Wal-Mart recently and we believe that, hopefully, they will be able to expand that business over the coming years.
Carlson: What exactly are they doing with Wal-Mart?
Lynn: Wal-Mart has a joint venture with Li & Fung and so Li & Fung will source products for Wal-Mart. So Wal-Mart has given Li & Fung certain categories of their business or especially in the international side and at Sam's Club to date. The big upside comes from large opportunities if they give to Li & Fung from the domestic business. So far, Li & Fung has performed extremely well and by outsourcing to Li & Fung Wal-Mart has realized very significant savings in terms of cost of goods sold. So, hopefully, this will make it attractive for Wal-Mart to give more business to Li & Fung.