Bridget Hughes: Hi, I'm Bridget Hughes. I'm one of the analysts at Morningstar. I am here at the 2010 Morningstar Investment Conference with Charles de Vaulx, who is one of the co-managers of IVA Worldwide and IVA International. Charles, thanks for being with us.
Charles de Vaulx: You're welcome.
Hughes: One of the things that you do have a reputation for keeping cash in the portfolio when you can't find good values, and both funds do still have 10% to 15% of assets in cash, but that's come down substantively since April. Can you talk about where you've been spending your money?
De Vaulx: Yes. We belong to the value investors that believe that it's okay at times to hold cash. When we hold cash, it's not us trying to time the market; it's just a reflection that we cannot find enough cheap securities. Now maybe we are not looking in the right spots. And you are right, late April, in our Worldwide Fund, we had 22.5% in cash, now we're down to roughly 13%.
So, we've been doing a little bit of shopping. Basically the view of the world is the same as it was two or three month ago. What has changed is that valuation has become more compelling as stock prices come down, so we've been able to do some buying. Oddly enough, we have been doing some buying in the U.S., we can maybe talk later about the areas, and we've even been able to add to one or two of our high-yield names.
Hughes: And the high yields, let's talk about that.
De Vaulx: Well, two month ago, the average yield to maturity on the bonds we still held had come down to 6.2%, which barely qualifies as an equity-type return. So, we were net sellers. We were down to 14% high yield, down from a 35% a year ago. But now the yield to maturity on our bonds have gone back up to 7.35%, and then there have been two names where we were able to add to our existing bonds with yields between 8% and 8.5%.
Now the bonds we own are very short in maturity, two to seven years. So that if inflation were to come back in two or three years from now, it should not bite us, and like conversely our bonds are extremely high quality. In fact, many of them are formally investment-grade. So I think that if things get worse, the economy or if deflation were to come back or accelerate, I think our bonds are money-good.
Hughes: And on the U.S. side, it's a big increase in worldwide?
De Vaulx: On the U.S. side, the U.S. market is not a uniform market, and we have found a few bargains amongst so-called large quality companies. But specifically, in the technology arena, we've been adding quite a bit to Dell Computer between $12.50, $13, this $3.50 of net cash, so you get the rest of the business at a very low multiple. And there are many other big technology companies, software-type companies, whose names I'm not able to mention right now that we have been buying--well-capitalized companies, very modest valuation.
We have also been adding in the United States two insurance brokers. Earlier in the year, we bought stocks such as Aon, Marsh & McLennan; these are well-capitalized companies. It's a service business. There's virtually no capital requirement. So as time goes on, these businesses we think should provide a good hedge against inflation. The cash flow should go up along with inflation, and so we think it's pretty neat to have that in the portfolio.
Hughes: One area that isn't highly represented in the portfolio is health care, and at the same time, one of your largest holdings is Astellas Pharma of Japan. Can you talk about, what's kept you away from health care and then what's so special about Astellas?
De Vaulx: Of course, when prices go down as they have for health-care stocks, we had a duty to have a look, but we found that the pharmaceutical industry in Western Europe, the U.S. still has a lot of headwinds; prices we're seeing I think are too high. They are struggling to come up with new drugs. And conversely with Astellas Pharma, which generates over 40% of their sales in the United States, we have found a company which is very unusual by Japanese standards.
The overwhelming reason why Japan is so cheap has nothing to do with their economic outlook. It has a lot to do with the fact that companies, by and large, are not managed for shareholders. I believe that Astellas Pharma is an exception.
Over the past five years, they have bought back 19% of their shares outstanding. Even though they need to replenish their pipeline, they have been very disciplined and many times have refused to overpay to make acquisitions. It's a company that has a reasonable dividend payout ratio of 30% to 35% of the earnings, and the stock is so cheap that the stock yields over 3.5%, which by Japanese standards, compared to 10-year government bond is not a bad thing.
If you strip out the remaining cash from the stock price, you're only paying five times operating income for the business. So it's much cheaper than Pfizer or Merck.
Hughes: Okay. Worldwide, certainly, the IVA style is one of the more eclectic styles, both Worldwide, the global-allocation fund, and International, the foreign-stock fund have some investments in both Hong Kong and Singapore government short-term debt. Can you talk about what role that's playing?
De Vaulx: Yes. Now we own, you're right, 3% or 4% of both funds in short-dated Asian currency bonds, which is still less, mind you, than the 6.7% we hold in gold bullion. Somehow, somewhere owning gold is a recognition that, today more than ever before, it's hard to find a decent currency. With a five- to 10-year view, it's hard to tell what is the ugliest, the dollar, the yen, the euro.
Having said that, I think long term, we believe that Asian currencies will go up. Eventually, we think that the Chinese renminbi will have to appreciate. As that happens, especially the Chinese currency, it should make it easier for Asian currencies, such as the Sing dollar or the Hong Kong dollar to go up.
Right now, the Hong Kong dollar is formally pegged to the U.S. dollar, but Hong Kong now belongs to China. Eventually, we think that the Hong Kong dollar will be merged into the Chinese currency.
On those bonds, the yields are very low. So clearly, the attempt on our part is in the long run to get equity-type return, thanks to the currency going up. Now, these are short-dated bonds and so, if in two years from now those currencies have not appreciated enough, we'll just roll over the position.
Hughes: All right. Well, thank you very much for your time, Charles. We will talk again soon.
De Vaulx: Thank you. I appreciate.