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By Greg Carlson | 06-24-2010 11:01 AM

O'Keefe: Look for Financials with Fee Income

Artisan's Dan O'Keefe will buy banks at the right price, but he prefers financial firms that produce a steady stream of fee income.

Greg Carlson: Hi, I am Greg Carlson, and I am a fund analyst with Morningstar. I'm joined today by Dan O'Keefe. He is the Co-Manager of Artisan International Value and Artisan Global Value. Dan, thanks for joining me today.

Daniel O'Keefe: Thank you. I'm glad to be here.

Carlson: Now, Dan, in both of your funds you have a fairly large weighting, relatively speaking, in financials. However, this is not what a lot of people might consider a typical financials exposure. Can you expand a little bit on that?

O'Keefe: Yes. So, as you know, Greg, we're focused on four key characteristics: We're focused on buying businesses at a discount to their intrinsic value; we're focused on financial strength; we're focused on superior business models; and, of course, we want to buy that within the context of the management team that's working in our interest.

And we generally gravitate within financials towards businesses that have some type of competitive advantage, some type of edge. And in financial services, generally, banks often don't meet that criterion because banking is frankly often a commodity business. So we tend to prefer fee-generating businesses, businesses that operate in areas where there is maybe an oligopolistic market structure, where there is less pricing pressure than often what you see in the traditional banking area, and again therefore, we often focus on these fee-generating businesses.

So, in Global Value today, for example, some of our largest holdings are American Express, which will be characterized as a financial but which is primarily a fee-generating business. Also we own Bank of New York, which is not really a bank; it's a trust bank, which means that it generates most of its profits and its revenue from the fees associated with holding assets in custody and servicing assets for their clients. Also Marsh & McLennan is another interesting company. It's a broker. It's an insurance broker. So it doesn't underwrite insurance, but it provides brokered services to clients who are buying insurance. So those are some of the more predominant financials within our portfolio, again fee-generating businesses versus traditional leveraged financials.

You know as we were walking over here before the interview chatting, we were talking about the fact that we have actually recently been dipping our toe more into some of the traditional levered financials, like a traditional bank like Lloyds Bank in the United Kingdom. We've also recently initiated position in Chubb, which is one of the world's largest property and casualty insurance businesses. While certainly not a traditional leveraged financial, it is an insurance business, which can be a leveraged business.

I think Lloyds is very interesting. So, despite being in the banking industry, it occupies a privileged position within its market, which is United Kingdom. And Lloyds is the largest retail and commercial bank in the United Kingdom and it's a very rational industry structure. There is only a few other players of any significant scale. And as a result of the financial crisis, we were able to buy it after it was recapitalized a number of times, so financially very strong after a lot of marginal competitors have been taken out of the industry because of the crisis, and at a price that significantly undervalues the franchise. So we were able to buy at around 80% to 85% of book. So, that gives you a good spread of the types of things that we're looking at from fee-generating businesses to now dipping our toes into some more traditional financials like Lloyds Bank.

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