June 25, 2010

At Morningstar Conference, DeVaulx Lauds Japanese Opportunities

Former First Eagle money manager notes Buffett sees investing value in Japanese companies

Responding to a question from an audience member at the Morningstar Investment Conference about investing opportunities in Japan, Charles DeVaulx said: "We've been dealing in Japan since 1995 and made a lot of money; it's been a wonderful experience."

DeVaulx, who came to prominence as the hand-picked successor to Jean-Marie Eveillard at First Eagle SoGen Funds but then left that exalted position unexpectedly in 2006, said "the key to Japan is to know the intrinsic values" of Japanese companies, and to sell them before their stock prices have reached their full value.

"Don't wait until they've reached 90% of intrinsic value" to sell, he said, but rather "at 75%."

Now at IVA, DeVaulx sees Japanese firms as cash-rich

It's simplistic to say that "Japanese companies are run for employees and management, not shareholders; it's more complex than that," said DeVaulx, who joined International Value Advisors (IVA) in 2008. "Some Japanese companies don't mind making a lot of money. They're now bloated with cash. If you removed that cash, you would see that the return on capital is very high."

He then cited no less an investing expert than Warren Buffett, who, DeVaulx said, is "aware that there are some wonderful companies in Japan." Moreover, DeVaulx pointed out that Japan now exports more to China than to the United States, making Japanese companies "a sort of back door to China." Finally, he said he'd "rather pay 1.5 times book for a Japanese company" than invest in a much more expensive Chinese company with questionable corporate governance.

Morningstar session features breakaway money managers

DeVaulx was only one member of a high-powered panel of money managers at the Friday, June 25, opening general session at the 22d annual Morningstar conference who had left large, high-profile asset management firms to start their own firms. Moderated by Karen Dolan, Morningstar's director of mutual fund research, the select group included London-based Hassan Elmasry, formerly of Morgan Stanley and now at Independent Franchise Partners, and David Corkins, former manager of the Janus Fund who, with a dozen or so other ex-Janusites, founded Arrowpoint Partners.

The theme of the panel was "Old Wine in New Skins," and focused on how these three money managers made the transition from large, multibillion-dollar mutual funds to boutique-like asset management firms, though the three men's ability to raise large piles of assets for their new ventures puts the lie to that thesis.

The star was clearly DeVaulx to this audience of advisors, however, which was most evident when the first question from the audience was directed to DeVaulx from an advisor who politely demanded to know what the benefit was to shareholders when a high-profile manager leaves one fund for another (the benefits to the manager are rather clear) and might have to spend more time raising assets than investing.

DeVaulx answered by saying that he had wanted to close the First Eagle SoGen fund much earlier than it was. While he was spending "30% of my time on the road, which was no more time than I did in 2005 or '06, when Jean-Marie said in 2001 that he would retire in '04, I spent a lot of time reassuring you guys," so DeVaulx was on the road for much of that time as well.

Then he asked rhetorically, "Why do you buy any fund? Was it the track record, was it because the fund was nimble, was it because you wanted a strategy that could be imitated by others? That's why I have a co-manager who's in the office while I'm on the road."

Another advisor asked whether these value managers saw any specific technology companies with long-term potential for growth. Elmasry, who has only 30 stocks in his (non-mutual fund so far) portfolio and shies away from high turnover, answered that he had concerns about Microsoft over the next 10 years.

"Will you need desktop PCs then?" Elmasry wondered. "Will you be willing to pay more money for the applications that they try to force down your throat? I mean, how complex do you need your word processing software to be?" He concluded that in the short term MSFT would do well, "but we don't think long-term that Microsoft's a buy-and hold stock for us."

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