Jason Stipp: I'm Jason Stipp for Morningstar. We're reporting from the 2010 Morningstar Investment Conference. And I am here with David Marcus. He is formerly of Mutual Series and he started some new funds at Evermore: Evermore Global Value Fund and Evermore European Value Fund.
He started these funds in December 2009. He is here to tell us a little bit about his experience in running those funds so far and also what he is seeing out there in the market today.
Thanks so much for joining me David.
David Marcus: Thank you.
Stipp: December 2009 to start two funds, the European Fund and the Global Value Fund. It seems like an auspicious time. What's been your experience in the last six months in running these funds from scratch?
Marcus: Well, we think it's actually an excellent time to be starting. History has proven over and over and over that you really get your best opportunities in the midst of a crisis, in the midst of the period of time where there is a lot of stress, strain, and uncertainty. And we have an abundance of that out in the marketplace today. So in building the funds and launching them, we think it's really a great time because there are so many dislocations globally with so much uncertainty creating significant value.
Stipp: And you are a bottom-up stock-picker. So you're obviously looking at macro trends, but you are also looking and very much focused on the individual company level. So given what you've seen in the market activity and the fundamentals of companies, would you say that the sell-offs that we've seen, especially overseas, has been overdone? Does it seem like the values are much better now? Or is it maybe we're back to reasonable valuations after the run-up that we had seen prior to this year?
Marcus: Well, we are definitely seeing valuations substantially lower than they were. Investors have generally, especially in the European markets, have come out of those markets and really have retreated back to their home markets, which is what typically people would do in a crisis. And so, it gives us a chance to go in at more compelling levels.
Do we know if the crisis is over, how long it will continue? We don't know. We assume it will continue. We'll assume that we have period of more volatility and stress out there. But we want to focus on those companies where there is significant strategic change going on. And for the things that we look for, which are deep value with significant canalysts; it's a perfect time because companies are transforming the way they operate. And especially with the crisis that started increasing, has spread around the world, companies are using that to their advantage to transform their businesses even faster to gear for the next phase of growth.
Stipp: So I wanted to ask you about that because you had mentioned before, before we were speaking, about how you look at the macro environment through the companies and how they will affect the companies that you are looking at. So what are some examples of how a company may be changing, and it might be changing faster because of the crisis that we've seen? And how is that affecting its valuation and its prospects as a company and as an investment?
Marcus: Sure. Well, one of our larger holdings is a German company called Siemens. Siemens is a 160-year-old business. And it's gone through one of the greatest restructuring since the company began. They are transforming the business. They are moving production out of Germany, which is a high-cost market to lower-cost markets. They are shedding businesses. If they can't be number one or number two in an industry, they want to sell it or IPO it; give it to the shareholders.
And there is a cost-cutting drive throughout the entire organization. And so, it's really – it's almost like pulling a glove inside out. It's a massive change. We think the market really doesn't understand how substantial it is, how undervalued the case is.
And at the same time, as a result of this crisis, separately, you've had the currency really collapse in the euro. And so that has given companies like Siemens sort of an unintended boost, which is since they are significant exporters, it helps their earnings because they are selling, let's say, in dollars and converting that back into euros, their earnings will be surprisingly stronger.
So even though they are restructuring, changing, doing all the things that they need to do to gear up for the next generation of growth, which will be led by Asian markets and the U.S, they also now have a cushion because of the, funny enough, the fact that they still are producing in high cost Germany in this period of time is actually helping them because they are producing in the euro and selling in dollars and other and then in Asian currencies that give them a benefit.
Stipp: So a bit of a silver lining at least for now. So it sounds like this is a good example then of a company that would perhaps be exemplary of the way that you've run the portfolio. So I wondered if you could speak a little bit about how these portfolios might be run differently than some other funds and some of the things specifically that you are looking for in your stock picks. It sounds like these turnaround or restructuring situations is one of those.
Marcus: We are exclusively focused on cheap stocks with catalysts. So we take a very active value approach, which is we are looking for $1 trading for $0.40 or $0.50, but instead of the typical, looking for cheap and not worrying about what will make it less cheap, in other words, what will drive it higher, our view is what will drive it higher, we have to know that there is a series of catalysts or events; restructuring, downsizing, maybe new management coming in. If it's a family controlled business in Asia or Europe, maybe they'll bring in a professional CEO for the first time in generations.
So we need to know that there is substantial change going on, and we need that. And so, we take the deep value with canalysts and add in this desire for having to have these canalysts in every single case. So we are only focused on special situations.
Stipp: And how long are you willing to wait?
Marcus: Well, we want to know that the process is underway. So when we enter something, we expect to be there, let's say, two-plus years; it could be three, four years or it could be longer. But we want to know that the change is already underway or we're on the cusp of it. And the market maybe is not rewarding this company for announcing the changes and for the results starting to improve yet, but we need to know that those canalysts are happening. We don't want to sit back and hope and pray that maybe they'll get their act together one day. That's a different style. We have to know that it's happening.
But we are very focused on sticking to our thesis, our understanding of the business. And if the company is not doing what they said they would do, and if it's not following the track that we expect for them, we're going to move on from that, because one of the great lessons that we have learned over the years is that when you buy something for a reason and that reason is not panning out, don't start coming up with other reasons because it's typically when you're going to really start to lose money. So we are not making excuses. We want to make results and returns for our investors.
Stipp: David Marcus of Evermore Funds, thanks so much for joining us and for your insights today.
Marcus: Thank you very much.
Stipp: For Morningstar I'm Jason Stipp. Thanks for watching.