Christopher Davis: I'm Christopher Davis, a senior fund analyst with Morningstar, and I'm here today with Eric Bokota. He is a comanager of FPA International Value, which launched last December. He is an alumnus of Oakmark International Value. He was one of the analysts there along with his comanager at FPA International Value, Pierre Py.
Well thanks for joining me today. I appreciate it.
Eric Bokota: Thanks for having me Chris.
Davis: FPA is well-known for its strong value orientation. They are absolute-value investors, meaning they are looking for stocks that look cheap, of course, on an absolute basis. Can you talk about how your approach to value fits in with FPA's overall?
Bokota: Sure. We are value investors, so we are looking to buy businesses at significant discounts to what we believe the fair value of those businesses are, but beyond just looking for businesses that are cheap, we have a strong bias toward buying high-quality businesses. And by that I mean businesses that have strong competitive positions, that generate good margins and returns on capital, and that have management teams that run the business well not only from an operational perspective but also that allocate capital in a manner which creates value for shareholders over the medium and longer term. We focus only on businesses that have strong balance sheets and good cash flow generation profiles, and are only interested in investing and we can buy in at a 33% or greater discount to our estimate of intrinsic value.
Davis: With your cohorts at FPA, when I think of the firm's CEO, Bob Rodriguez, he is kind of known for having a relatively pessimistic outlook on the economy. He's very worried about government debt in the United States and across the world, especially in Europe. And if you look at your portfolio, it's overwhelmingly titled toward European investments. Could you talk about how you incorporate macroeconomic concerns, big-picture concerns about the economy and your investments in a troubled part of the world?
Bokota: Sure. We certainly share many of Bob's concerns about the macroeconomic environment in Western Europe. Although our portfolio is heavily tilted toward companies domiciled in Western Europe, I think it's important to understand that many of these are global businesses and that more than 50% of the free cash flow of the portfolio of companies that we have is coming from outside Western Europe. So, while the businesses are domiciled in Western Europe, these are truly global enterprises.
The way that we incorporate the difficulty that we're seeing in Western Europe is in two ways. Firstly, the way that the assumptions that we make regarding the future free cash flow generation of the companies is that we have fairly conservative estimates reflecting the difficulties, not only in Western Europe but really throughout the developed world. Secondly, because there are concerns about the financials sector in Europe, we see that there could be systemic risks in the region. And it's very important for us to buy companies that have strong balance sheets that we're convinced will not only weather the storm in a very harsh economic environment, but that will ultimately emerge stronger. So, the businesses that we own have low levels of financial leverage and don't have significant refinancing needs over the near and medium term.