Steve Forbes Interview: Apple, Microsoft And Wal-Mart Are Better Buys Than Investors Think? ~ MAKE MONEY BLOG$

Jim Kieffer is the managing director of Artisan, and the portfolio co-manager of Artisan’s three U.S. value funds. Kieffer and his two co-managers were recently named Morningstar‘s Domestic Stock Manager of the Year for their success in 2011. Recently, he sat down with Steve Forbes to talk about his recent performance and the stocks he likes now. Video and a transcript of the second half of their conversation follows. Watch the first half here.

Forbes: Now you and your two colleagues have done well recently. But you’re also well aware of the law of the regression to the mean. One, how do you, in your own minds, avoid that? And two, even among the best managers they go through down periods. Even though a manager is not supposed to be emotional, certainly pension funds seem to go with those who have the hot hand and leave those who have a cold hand. Whereas research shows, no, if the guy’s got a good long-term record, if he’s got a cold streak that’s precisely the time you should check in.

Kieffer: You’re right. And that’s kind of driving that mega cap story right now. Mega cap has a cold hand and people aren’t investing in it. Will we have a cold hand at some point? Sure. As a matter of fact, 2010 was an awful year for us. It was the worst year in our careers from a relative perspective. Most all of our peers trounced us in 2010.

So that probably contributed to 2011 as well. We weren’t as stupid as it seemed in 2010. We weren’t as smart as it may have seemed in 2011. And then you go back in 2008, 2009, those were decent periods for us. So I think you do need to examine over a long time frame, “Has this person managed the markets effectively?”

Part of that has to do with risk – once you’ve lost money it’s a heck of a lot harder to make it back. With our focus on risk the markets you really get tested in, those risk-fearing markets tend to be markets that we do better in.

Now risk-seeking markets, where you start pushing valuation and markets start moving in one way direction, we’re going to have more difficult time with those. So I don’t know what’s happening next. But I can tell if you it’s a risk-seeking market it is going to be more challenging for us. If it’s a risk fearing market we’ll probably hold our ground all right.

Forbes: So what happened in 2010?

Kieffer: 2010 is one of those markets that was turned into more a risk-seeking market. You had the recovery from 2008 and 2009. So in 2010, as the year went on, you had cyclicals that gained strength and continued to gain strength. The cyclicals that we owned we had sold off earlier in the year. They became more demanding so we moved onto other fare.

You also had more of a price momentum market occurring. That’s exactly going against what works for us. We’re essentially buying what they’re selling and selling what they’re buying. So we had already sold all the things they continued to buy with that price momentum influence.

Back in 2010 there was greater confidence that economic recovery was picking up steam. Those bets, so to say, had gained some currency. As that continued on in the later part of the year, we started to get left behind. Then in 2011 some of those thoughts fell apart and that allowed us to come back into the game.

Forbes: You don’t have metrics where you assign a weight of 20 to this and 30% to that. There is a human judgment in there. Do you ever have periods where you scratch your head and say, “Are we doing the right thing? Have we truly lost it?”

Kieffer: I was mentioning, about a decade ago, small-cap in our portfolio selling for less than book value. I remember going to Scott Satterwhite, my partner, and we were 5,000 basis points behind the S&P 500 in that year. And I said to him I said, “You know, I know we’re going to do better in the future. But, boy, I don’t know if we’re going to close that gap.”

We did, thanks partly to the S&P coming back at us pretty significantly there. So you have those periods. But if you have a well-thought-out strategy that makes intuitive sense that you can exercise regularly and have seen the market regularly allow you to exercise, you don’t lose confidence during those time periods.

You’re frustrated by them. Everybody likes to win. Everybody likes to win all the time. But that’s not the way it works. You recognize that you’re going to be out of sync with the character of the market at different times.

Forbes: International. Do you deliberately pick international or you just count on multi-nationals to do the heavy lifting for you?

Kieffer: It’s interesting because there’s this whole phenomenon at the moment where money is going towards global funds. Our Artisan Value Fund doesn’t have global in its name but it is a global-oriented fund. The mega-cap companies that we own, more often than not, are getting a much greater amount of their growth from international markets than they are from domestic markets.

There’s a little bit of a definitional issue going on nowadays where the location the company is domiciled seems to be an indicator of whether it has investment attraction from that big picture phenomenon. Our portfolio is very international. It’s domestically-traded companies primarily, but it’s international.

Now mind you, this is a more flexible portfolio. We actually do have the ability to go abroad as well and purchase companies that trade in foreign domiciles. They’re more of a supplement, where we will have looked at something on a domestic basis and as part of the competitive set will have examined

international-domiciled companies and may choose that instead, because it was better achiever. Tesco is an example of a company like that that we own at the moment. But all large-cap companies and portfolios are very international nowadays.

Forbes: So where are you looking right now? Apple.

Kieffer: We own Apple. We own Apple and it may be a little bit unusual for a value guys to own Apple. It may sound out of character at first. But I think when you step back and examine the facts it starts to make a lot more sense. First off when we purchased it Apple, we bought it last spring. You may not be able to recall as much anymore, but Apple actually started to fall out of favor last spring.

There was concern about its ability to meet the earnings estimates for that coming quarter. There was concern about Steve Jobs‘ health. So the stock had sold down and we saw it as an opportunity that we had missed in previous times and stepped in to buy it. You sit here today and say, “Well, but Apple is the largest market cap in America or second largest cap in America. The stock’s been on a tear for ten years and so forth. How can a value guy own it?”

Well, again, if you step back and look at the facts you go, “Well, wait a minute. This is a company on the cusp of accumulating $100 billion in cash at this point in time. This is a company at selling at low teens. This is a company that has very dominant products that are actually early in their growth acceptance – whether you’re talking about in other geographies or even in the U.S. There’s still a lot of growth this company can make.”

So it’s an unusual circumstance from that perspective. When we look at those numbers and think about what the business is about and what its possibilities are, there’s still a lot of opportunity in it. It may not fit the classic value definition from having been a hot performer historically, but the business has been an even more red-hot performer.

Forbes: If you take out the cash and do forward earnings it’s almost single digits, isn’t it?

source: forbes.com

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