Rare Opportunities for Long-Term Investors

Greg Carlson: Hi. My name is Greg Carlson. I'm a fund analyst with Morningstar. I'm here today with Dan O'Keefe, the manager of Artisan International Value (ARTKX), and Artisan Global (ARTGX). Dan, thanks for joining us today.

Dan O'Keefe: Thank you. It's a pleasure to be here.

Carlson: Now Dan, you and your co-manager, David Samra, run both funds. You and your team are value investors at heart, but you focused on the "quality" of a company than most value investors. Can you expand on that a little bit?

O'Keefe: Sure Greg. For us, the most important component of any investment that we look at is buying the business at the right price. So we look at the intrinsic value of the business, we buy the business at a price that allows us to generate a return as price and intrinsic value converge. But price isn't enough for us, we need to see other characteristics as well.

We look for higher quality businesses, businesses that have sustainable competitive advantages, businesses that we can understand. We look for financial strength, strong balance sheets, high free cash flow generation, and lastly we look for management teams who have the ability to manage the business effectively and drive shareholder value for us, ultimately, for us, the owners.

Carlson: Can you talk about a couple of holdings? Experian, I know, is a favorite for both funds.

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O'Keefe: We continue to look in all areas for investments, and we have continued to look in the financial services area. But we have not been able to find a traditional bank, for example, that meets all four of the characteristics that I talked about.

So our research has led us to more financial services from a fee-generating angle, so we have a very large position in a business called Experian, which is a provider of information to financial services companies.

They provide information on consumer credit, business credit, the software and systems and analytics that go into evaluating credit within a bank, monitoring credit trends within a bank, and it's a very sticky business model. It's a very recurring revenue-fee business model. It's a business that operates with only two meaningful competitors, so it's a very healthy industry structure.

We're able to buy that business today with 10 times the earnings. Again, with the strong balance sheet, their taking market share against some of the competitors, their global footprint gives them competitive advantages where some of their competitors who are often regionally focused do not possess. So really, it's a great example of what you're able to find in the marketplace today.

Very rarely are you able to buy the best business in its industry, Experian, which is a clear market leader, a business with a very high returns on capital, a very strong balance sheet, and with a management team that understands when to play offense and grow the business, and when to play defense and protect the profits.

Today, Experian is an example of that rare coalescence of those four factors at one point in time, which I think is unique.

Carlson: And you've also been able to buy a couple of these steady-eddie, huge consumer product companies that normally don't fit your evaluation criteria.

O'Keefe: That's right. I think as investors, over the last several months, have become more enchanted with the idea that there might be an economic recovery. They've shifted their focus away from some of the steadier businesses, which held up relatively better in 2008, and moved assets into businesses that are maybe more charged into an economic recovery.

They've sold some of these stocks down to evaluations that are extremely attractive for long term investors. Today, you're able to buy some of the best packaged goods, consumer packaged goods businesses in the world. Like a Diageo (DEO), a Unilever (UL), a Cadbury .

Businesses that are highly profitable generate tremendous free cash flows, have nice dividend yields, strong balance sheets, brands that have been built up through decades of marketing advertising and investment had multiples that are absolutely and relatively attractive. In some cases, eleven, twelve times earnings.

For those businesses, those are multiples that you rarely see for any meaningful period of time. We're very attracted to those today.

Carlson: On the other hand, emerging markets is obviously an area that's seen a lot of really sharp ups and downs over the last couple of years. You haven't owned much there, and that continues to be the case it seems.

O'Keefe: That's right. It feels like deja vu all over again. If you got back 18 months or so, I guess in 2007 or 2008, there was this bifurcation in the market between developed economies in Europe. Developed stock markets in developed economies in the U.S. and Europe, where investors were very concerned about recession, consumers not spending, economies are shrinking.

On the other hand, they're bidding up the value of emerging market economies, they're bidding up the value of commodities, in the belief that these economies will somehow continue to grow, that oil prices will continue to go higher, even though the main consumer market for those goods and services is shrinking, and we're starting to see that emerge today.

So you have the developed economies stock markets doing much worse, in the U.S., the stock market is flattish or down a little bit so far this year, emerging markets are up thirty or forty percent. Commodities are starting to boom again.

To us, that just seems to be completely unsustainable. If the U.S. economy is indeed going to continue to shrink, and the U.S. consumer is indeed going to continue to retrench, then all those goods and services that are imported from those economies, reliant as they are upon exports, those economies are not going to be able to withstand the downdraft of our consumption shortfall. So we think those markets have gone completely ahead of themselves.

Carlson: OK. Thank you very much for joining us today, Dan.

O'Keefe: You're welcome. It was my pleasure.