Value Investor Insight
Investor Insight: Sarah Ketterer
Sarah Ketterer and Harry Hartford of Causeway Capital describe how they invest differently in developed versus emerg-ing markets, where they find the worst allocation of capital, how they risk-adjust their share-return expectations, andwhat they think the market is missing in Western Union, Tesco, Babcock & Wilcox and Tecnicas Reunidas.
How has international investing mostchanged since you started out more than20 years ago?Sarah Ketterer:
When I was setting upHotchkis & Wiley’s international equitybusiness in 1990, the most interestingopportunities were in taking advantage of the arbitrage between valuations thatappeared more rational and well-recog-nized in the U.S. and those that were lessso overseas. International stocks were justgenerally less efficiently priced thanstocks in the U.S.That gap between the U.S. and non-U.S. developed markets has closed dra-matically. One reason Causeway hasevolved more into global developed-mar-ket strategies rather than internationalonly is because the opportunity set hasessentially become one. Money nowmoves so fluidly between markets that thehistorical differences between U.S. andnon-U.S. markets no longer apply.
What key inefficiencies remain for you totake advantage of?SK:
The primary inefficiency is one of time frame. Especially in the past fiveyears, with the frayed nerves of investorsafter the 2008 crisis and with the contin-ued rise of hedge funds, ETFs and com-puterized trading, time frames have trun-cated. Our investment horizon is threeyears, give or take, which allows us toinvest with no obvious catalyst otherthan mean reversion and a return to nor-malcy. That works when nobody ispatient anymore.
There are a few types of situations that typically attract us. It maybe in businesses that are cyclical and out-of-favor and the market in our estimationmisprices the stock out of impatience oran unwillingness to accept that the cyclewill mean-revert. It may be in businesseswhere management has erred, say in over-reaching with an acquisition, where webelieve the damage ultimately to beincurred is far less than is currently pricedinto the stock. Often it’s just thatinvestors move in herds and overinvest inone part of the market – say technology,media and telecom stocks in the late1990s – leaving whole industries ignoredand very cheap.In the past couple of years, for exam-ple, we have found opportunity in indus-trial companies – often with businessesthat are energy- or infrastructure-related.These are companies that typically have aheavy orientation to emerging markets inLatin America, Asia and the Middle East,but trade at modest European- orAmerican-market prices.So a company like Siemens [SIE:GR],maybe because it’s domiciled in Europe,maybe because it’s had high-profile run-ins with the authorities over past bribes,maybe because investors consider it anunfocused conglomerate, trades at only10x our earnings estimate two years’ out,when, in fact, we believe it’s geared itself to emerging-market transportation, ener-gy and infrastructure capital spendingand has the capacity to generate signifi-cant growth. It’s well-managed, stronglyfocused on returns on capital, has a veryunderleveraged balance sheet and pays a4% annual dividend yield. That’s the typeof story we find interesting.
How did you respond when investorsdumped European stocks
We made the bedrock assumptionthat the euro zone would remain intact,primarily because the cost of a breakupin our view would greatly exceed the costof funding peripheral sovereign debt. Soas investors fled European banks and
Not Far From the Tree
The daughter of prominent Los Angelesinvestor John Hotchkis, co-founder ofHotchkis & Wiley, Sarah Ketterer was lessthan enthused by her first up-close expo-sure to investment management. “I spentone summer in college filing tearsheets atmy father's firm,”she says. “It was so awfulI swore I'd never go back.”After an Economics degree from Stanford,an MBA from Dartmouth and spending fiveyears in investment banking, Ketterer didgo back in 1990 to lead Hotchkis &Wiley's initial foray into international equi-ties. She held that position through thefirm’s 1996 acquisition by Merrill Lynch,but decided in 2001 to partner with long-time colleague Harry Hartford to launchtheir own international money-manage-ment firm, Causeway Capital.“I'm sure as a kid I had more exposure thanmost to the world of equities, but once I joined his firm my father made a point of let-ting me ascend on my own or hang myself,”Ketterer says. “I had plenty of people to talkto and books to read – which were invalu-able – but given how rapidly foreign mar-kets were evolving, the best way to learnearly on was rolling up my sleeves and try-ing to figure it out for myself.”