You've had a tough time this year, particularly within their growth-oriented categories, and not – they've lagged the EAFE, the blend index, core index, but the growth category seem to be really taking off this year compared to the EAFE. Can you talk a little bit about maybe what some of the sources of that performance is, relative performance is?
Yockey: Sure. People are clearly worried about too much debt in Europe, just like people are worried about too much debt in the United States, and it's something to be concerned about. But the question goes back to you can't have economies without banks. And banks on a long-term basis represent wonderful franchises in our mind. And as a lot of the competition has been weakened, that means the stronger banks are going to be even in a better position to grow going forward.
So we think the companies like BNP and the companies like HSBC, which have wonderful franchises and are highly profitable and have had relatively little exposure to the subprime crisis in the United States, are going to be in a good position to grow forward when things get – when things quiet down in the Southern European front.
Carlson: Can you expand a little bit more on the franchises at these businesses because I think sometimes we regard all banks as being in sort of a commodity business? But you spoke earlier about how some of these banks are uniquely positioned within their countries, for example?
Yockey: Sure. There's relatively few banks in most European countries, and just like you're having fewer and fewer banks in the United States as the consolidation process continues. In Europe, you've had this consolidation process going on for a while. So in a place like the U.K. there's really three major banks that have dominant market shares. In France, there's probably five banks that have dominant market shares. In Holland, there are three banks that have dominant market shares. And as you have less competition, over time you're going to have higher profitability.
And the other thing is, when there is a period of credit stress, financials are able to price their loans at a higher level than they would otherwise, because it's just like any commodity--as you point out, money is a commodity. If there is less of it, you're going to price it more aggressively because it's worth more. So, we're thinking over time that lending spreads are going to increase and then profitability for these companies is going to grow a lot.
Carlson: And circling back to Japan for a minute, can you expand your thoughts there and why your – the fund has a relatively light stake in that country?
Yockey: Well, we think Japan is a disaster waiting to happen. They have way too much debt. If you think the Greeks have problems, the Japanese have twice as many problems as the Greeks do. They have 200% debt to GDP and they have the worst demographics in the world. So you have fewer and fewer people working, more and more people retiring. There is no immigration, and they have way too much debt. So, over time, we're thinking that that currency, maybe it will take a year, maybe it will take five years. At some point in time, the yen is going to weaken because there has to be some relief pressure to allow the country to survive.
And on the pecking order for importance, the shareholder in Japan is actually pretty far down the totem pole. The most important interest group for a Japanese company is the customer; the second most important client group is the employees; and the third most important is the shareholders. So shareholders are pretty far down on the pecking order.
Japanese companies don't believe in paying dividends for the most part. There is a couple of exceptions. And there is no growth in the domestic economy because the population has imploded. And besides that, if that isn't enough, it's one of the most high-cost places in the world to do business. So for that and there is probably a couple of things I have forgotten, that's why we don't have very much money invested in Japan.
Carlson: Fair enough. Maybe we could turn to emerging markets. You spoke earlier about China in particular. Obviously, a lot of folks are interested in China, very excited about the prospects there. But do the valuations there reflect that to a large degree? Or how do you assess that?
Yockey: Well, there's really two markets. There is the domestic Chinese market, which foreigners have a very difficult time accessing, and then there is one portion of the market that is traded through Hong Kong, and that's the part of the market that we're able to access. The companies listed in either Hong Kong or – there are a few Chinese companies listed in United States, actually some of the valuations are pretty attractive; for instance, the banks.
The banks are quite well capitalized. They are controlled by the government. And they tend to be highly profitable. And they also tend to pay very high dividends. And they grow with the underlying economy. So, the Chinese economy has been growing at over 10% a year for the last 10 years, and as long as the currency stays as undervalued as it is, we think the economy is going to continue to grow, and the financials are going to grow along with the economy.
Four or five years ago, no one would have believed that the Chinese banks would be some of the biggest banks in the world, and today they are. They are much more profitable than most American or European banks, and we expect that to continue.
Carlson: Okay. Very good. Thanks very much for joining us today, Mark.
Yockey: Thanks.
