In what markets does Brookfield Asset Management operate?
Andrew Boord: Brookfield has three businesses segments. Their first segment is commercial real estate. Brookfield owns many office buildings in lower Manhattan and the high-end Canary Wharf section of London. They have a wide area of operations from Calgary, Canada to Perth, Australia. Brookfield also owns a third of General Growth Properties, a large REIT (real estate investment trust). The second area of operation is infrastructure which includes electrical power generation, railroads, toll roads, and seaports. The last segment is renewable energy. Brookfield is the largest owner of hydroelectric assets in the world and one of the larger owners of wind power generation.
What kinds of questions do you ask management on company visits?
John Fox: It all depends on the business, but there are some common questions that arise in these meetings. For example, questions surround topics about: trends in the business, the competitive environment, and financial goals such as how fast they project to grow. One important question we always ask concerns the company’s plans for their free cash flow. We look for businesses that have strong free cash flow and like to see that they allocate this capital wisely. In subsequent meetings, we determine if they have met these capital allocation goals. Overall, we want to get to know management intimately over time and it’s important to see how their view of their operation changes — especially during periods of adversity.
What is China’s impact on FAM Funds’ holdings?
Drew Wilson: First, we invest in domestic stocks. However, many of our holdings do have exposure to China either through selling products into the country or selling products, which are made in China, elsewhere. As a result, near-term earnings of these businesses decreased along with their stock prices. However, the holdings in our Funds are cutting costs that aren’t necessary and increasing productivity. Activities like this may help improve their per-share intrinsic value. The companies we invest in have strong free cash flow and balance sheets. This may allow them to buy competitors that might be struggling or buy back their own shares if they have become attractively priced. For us, this situation may provide opportunities to invest in high-quality industrial businesses at discounted prices.
Can you speak to the Information Technology and Health Care Sectors?
Paul Hogan: One area I would like to highlight is the Semiconductor Industry within the Information Technology Sector. We have witnessed that semiconductor companies have been in a slump for approximately five quarters. Typically, cycles in the Semiconductor Industry run from four to six quarters until they hit a trough. After that period, stock prices typically begin to increase so we may be able to seize an opportunity to invest in high-quality
semiconductor companies at bargain prices.
John Fox: Valuations for the Health Care Sector are pretty high. It has been one of the best sectors in the market, but it’s been hard to find stocks that we can invest in at a discount to our estimate of intrinsic value. We have always invested in this space, but it has become more difficult to find stocks that are attractive to us. However, when we have invested in the Health Care Sector, we have typically been pleased with the performance of those stocks.
Will you give an update on Fossil Group?
Kevin Gioia: Fossil Group is a more recent holding that we have added. Fossil is in the fashion apparel industry and most of their business comes from the sale of wristwatches. Fossil has been successful with building their own brand. At the same time, Fossil has profited through their preferred partner/license agreements with other companies such as Michael Kors, Armani, and Marc Jacobs. Through their license agreements they can provide a low-cost advantage
to their partners. Additionally, Fossil’s CEO doesn’t take a salary; instead he owns about a 12% stake in the business. We like this fact because the CEO’s interests are clearly aligned with shareholders.
Will you give us an example of a long-term holding and explain why you still like it?
Marc Roberts: Since the FAM Small Cap Fund was launched in March 2012, we do not have any long-term holdings of more than five years. However, a company that I expect to be a long-term holding in the Fund is Diamond Hill Investment Group. This is an industry that we know very well, the investment management business. Also, Diamond Hill invests similarly to us — they are value investors. They have investment products that range from small- to large-caps with some income-oriented funds as well. The founder still owns a large percentage of the company so we know his interests are aligned with shareholders.
Do you have a set price-to-earnings ratio that you look for?
Tom Putnam: We do not have a set price-to-earnings ratio that we look at across the board for any company. It depends on the industry because a lot of businesses are valued differently. For example, in the insurance and banking industries we look more at the growth of the value of the enterprise which is the book value. For other businesses, we like to look at free cash flow numbers to see the value of the company in relationship to the amount of cash it generates historically. We then seek to purchase the stock at a lower valuation compared to its historical average.