The Value Seekers
Daniel O'Keefe and David Samra scour the world for the most attractive value stocks for their Artisan Partners funds.
With the distinction between U.S. and international companies increasingly blurring, Daniel O'Keefe and David Samra, managers of the top-rated, $10.5 billion Artisan International Value fund (ticker: ARTKX), branched out six years ago, startingArtisan Global Value fund (ARTGX). The fund has grown to $1.1 billion in assets—but the strategy has a total of $12.3 billion, including institutional money managed along the same line.
"It has become almost impossible to allocate between international and the U.S.," says O'Keefe, 43 years old, who is Global Value's lead manager. "In many cases, all you are doing is allocating capital based on where the company is listed, and not where it is generating profits. It becomes a false distinction."
Global Value uses the same strategy the pair honed at International Value and applies it without regard to location. They're looking for firms that trade at steep discounts to underlying value, with strong balance sheets and savvy management.
The result: A focused portfolio, with just 44 stocks, recently tilted toward the U.S., where top picks include Oracle (ORCL),Bank of New York Mellon (BK), andMicrosoft (MSFT)—and, to a lesser extent, Europe, where holdings include Tesco (TSCO.UK) and Royal Bank of Scotland (RBS). They've largely steered clear of emerging-markets stocks, though many of their multinational holdings get some of their profits or revenues there, and they've currently got minimal exposure to Asia. Over the past three years, Global Value has trounced most of its world-stock competitors, returning an average annualized 16.5%, versus 10.3% for the category, according to Morningstar.
Samra and O'Keefe first met in the summer of 1997, when they joined Chicago-based Harris Associates, investment advisor to the Oakmark funds, within days of each other. Samra, 49, has a bachelor's in finance from Bentley College and an M.B.A. from Columbia University, and previously worked as a portfolio manager at Montgomery Asset Management. O'Keefe, who studied philosophy at Northwestern University, moved into the money-management business after working as an analyst at Morningstar. In the early '90s, O'Keefe recalls, he was hooked after interviewing value-stock legend Wally Weitz for one of his first Morningstar reports.
"One does not become a value investor unless you really have the personality for it," Samra says. "You end up owning things like Oracle and Tesco, where you are banging your head against the wall because the valuation is cheap and you can see that you would make money if the news would just get a little better. Most investors are psychologically ill-prepared to deal with that kind of negative information flow on a daily basis…. Dan and I have the kinds of personalities that lend themselves to it."
While at Oakmark, the two honed their value investing style. But they knew that Oakmark's star manager, David Herro, who has run the Oakmark International fund since 1992, wasn't going anywhere. So in May 2002, they moved to San Francisco and joined Artisan Partners. At Artisan, Samra and O'Keefe were able to carve out their own space, first with International Value, launched a few months after their arrival, and then with Global Value, founded in 2007.
*All returns are as of Nov. 13, 2013; three- and five -year returns are annualized. ** As of Oct. 31, 2013. Sources: Morningstar; Artisan Partners The timing was inauspicious: The nascent strategy tumbled 29.3% in 2008 as stocks tanked, but those plummeting prices gave the duo easy pickings to buy. "Every development in the news was a reason to sell. It created a huge valuation opportunity," O'Keefe recalls. Four years ago, the overall portfolio traded at around 11 times depressed forward earnings, compared with a P/E of 14 today.
WEALTH MANAGERS R.W. ROGÉswitched from International Value, where they'd first invested in 2004, to Global Value, where they now have $10 million of clients' assets, in an effort to gain flexibility. "They're firing on all cylinders," says Steven Rogé the firm's director of research. "Artisan lets these guys operate as an autonomous entity so you don't get a watered-down version of the asset manager."
O'Keefe and Samra are still finding pockets of opportunity. While Samra and O'Keefe shunned financials leading up to the crisis, they have been snapping some up on the cheap. "As the recession proceeded, and the banking system started to recapitalize, valuations became attractive," says O'Keefe.
The financials they've bought run the gamut from Bank of New York, the U.S. trust bank, which generates a lot of fee income and is the fund's third-largest holding, to Royal Bank of Scotland, the battered U.K. bank. Financials account for 32% of the Global Value portfolio—the single largest sector.
O'Keefe and Samra also like out-of-favor tech giants like Oracle, the fund's largest holding, and Microsoft. Oracle, O'Keefe figures, trades at around 11 times estimated earnings, and could go to a P/E of 15, while rising profit margins will increase those future earnings. Microsoft, meanwhile, trades at a similarly low multiple, yet is increasing its earnings and has about $8 a share of net cash. "These companies are integral to the efficiency and productivity of the corporations they serve," O'Keefe says, "yet they trade based on near-term quarterly movements in guidance, instead of as the hugely entrenched, steady cash-generating businesses they have evolved into."
Another battered stock they like: Tesco. In the past few years, Tesco lost market share in the U.K. and its international expansion turned to retreat. But it's refocusing under the current CEO, and shares are cheap at just 11 times earnings. "In the U.K., Tesco is everywhere," O'Keefe says. "It's more dominant there than Wal-Mart is in the U.S."
With value stocks like these, a payoff can take time, and Samra and O'Keefe will wait with you: Most of their money is invested in the firm and their funds.