Dean Tenerelli

Uploaded by WealthTrack on 27.04.2012

CONSUELO MACK: This week on WealthTrack, the perspective of a long-time European resident
and veteran stock picker. Why T. Rowe Price’s Dean Tenerelli is so upbeat about the future
of unloved European stocks, next on Consuelo Mack WealthTrack.
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Hello and welcome to this edition of WealthTrack. I’m Consuelo Mack. According to a number
of major Wall Street firms, we may be witnessing a big shift away from safe haven bonds and
into stocks. As Goldman Sachs’ chief global equity strategist Peter Oppenheimer put it,
it’s time to say “a long goodbye to bonds and embrace the “long good buy for equities.”
And what’s particularly notable is that the global equity bulls are not just high
on U.S. stocks, they also like European stocks, which have been in the dog house for a long
time. This year, European stocks are in the plus column. The main reason is reduced worries
about the Euro-zone debt crisis. The recent European central bank’s “longer term refinancing
operation”, known as LTRO, is providing cheap three-year loans to Eurozone commercial
banks. This has sparked a big rally in global equities, and been termed a game-changer for
European stock markets.
But some critics are worried that LTRO is setting up a future crisis, as European banks
become dependent on artificially cheap financing. The result could be a new credit binge, and
as banks buy their own government’s bonds, the fate of the banks and their country’s
sovereign debt become intertwined. As one European observer told the Financial Times,
“it’s like tying two drowning people together in the hope they will float.”
Nonetheless, there are reasons to believe that European stocks are now attractive. For
one thing, they’re cheap- over the past five years they were down by some 15% through
the end of last year; down 27% for Eurozone stocks alone, as compared to U.S. equities,
which were up 3%. From the U.S. perspective, that’s made a lot of sense. All we have
read about until recently concerning Europe has been about debt crises in Greece, Spain,
and Italy with no solutions in sight. Then there’s Europe’s slow to negative economic
growth, with high unemployment rates that have been endemic to the region.
But our guest this week sees cause for optimism. He is London-based Dean Tenerelli, portfolio
manager of the T. Rowe Price European Stock Fund. Tenerelli, an American, has been working
as a money manager and living in Europe for many years, starting as an equity analyst
in Madrid following Spanish stocks. Since 2005 he’s headed T. Rowe Price’s European
Stock Fund, where he has consistently beaten the market and his category. In our recent
interview in Paris, I asked Dean Tenerelli about his investment philosophy and his expectations
for European stocks?
DEAN TENERELLI: Well, the fund is designed to invest in the most profitable companies
in Europe, specifically companies with higher return on capital employed. Limited amount
of cyclicality, so a company that typically can clear its cost of capital even in a down
cycle. And through that, over time, to accrete returns which are greater than market returns.
Valuation isn’t a core part of the fund, because it’s great to buy great companies,
but you need to buy them cheaply or they don’t work. They don’t go up. So, I spend a lot
of time on free cash flow analysis and DCF and earnings power of the company. So there’s
a very strong valuation discipline. And I don’t like to pay up for growth. So I typically
won’t have very, very high growth companies with very, very high PEs, because I’m very
skeptical of growth and how long it can last for.
And I’ve always been investing this way, after having been a telecoms analyst in the
late ‘90s and watching that. So I picked up a few tips about growth and its sustainability,
and also a skepticism about it. So I concentrate very hard on taking growth out, being realistic
with expectations, doing free cash analysis, figuring out how much the company’s worth,
and then buying it at a discount. It doesn’t matter if the company’s growing or it isn’t
growing to me.
CONSUELO MACK: How much attention do you pay to the macro picture in Europe, which has
been, you know, a dominant headline ever since the financial crisis?
DEAN TENERELLI: Well, pre the crisis, I would have said zero. Post the crisis, I think we
need to be aware of it for market timing and for interesting entry points. It’s actually
shaping the fundamentals of what’s going on at sectors like the banking sector, or
the insurance sector, where it, you know, has been critical in forcing these companies
to divest and to shrink their balance sheets. So, a macro is a factor. Let’s call it 30%,
20%, not more.
CONSUELO MACK: Depending on the market, the year and, yeah--
DEAN TENERELLI: Depending on the market. But the focus is companies, and trying to get
great businesses in the fund that are going to give me good returns over the next multiple
CONSUELO MACK: So what is your assessment of the macro picture in Europe? There are
a lot of skeptics still in the States, looking overseas, and they don’t believe what’s
happening to the Greek restructuring. They don’t think it’s sustainable. You’re
here. What’s your view of the European macro picture?
DEAN TENERELLI: Well, I think it’s right to be skeptical, in Europe, outside Europe.
There’s a lot of debt in the world, and there’s a lot of time going to take to pay
off the debts. I think what’s going on in Europe- and I think the LTRO has been a game-changer,
has been a home run by the European Central bank.
CONSUELO MACK: And again, that’s the long-term refinancing operation.
DEAN TENERELLI: That’s correct. Which, they’ve pumped in about a trillion of liquidity gross
into the banking system. And …
CONSUELO MACK: And this is, the ECB has pumped it in. Is that right?
DEAN TENERELLI: That is correct. The ECB. What that has meant is that banks no longer
have to finance for the next three years. They are taken out of the market, and instead
of financing in the market, they’ll go to the ECB, and they will get financing, which
has opened up and unblocked credit markets completely in Europe. Which, in November of
last year, were completely closed. So, additionally though, it also shows that many people were
skeptical that the European Central Bank was going to be able to act to fund the crisis,
and to stop the crisis, and provide liquidity. Well, they have. And the financing markets
are wide open. The banks that we’re talking to and meeting with have done, in some cases,
half of the year’s financing already, just in the first quarter. It is a much better
environment today than it was before. So I think we are on our way to healing.
The other point I’d like to make is, the work that we’re doing here, in decreasing
our debt burden-and the target, again, for the EU is to bring it down to three percent
of net debt to GDP by 2013…
CONSUELO MACK: And where is it now?
DEAN TENERELLI: Well, overall, will be about five for the whole EU. So, bring that down
to three percent. And, five isn’t such a great number, if you think about it. I mean,
the U.S. is up at eight percent. The key point I say that is because, overall, Europe, the
cash is there. It’s about spreading it. So then it becomes an issue of how to transfer
this wealth and, you know, how that becomes a social issue and a political issue. And
that’s the difficulty of it.
But I think what’s happened over the last six months is that it’s unfolded that that
is exactly what’s happening, at the cost of those governments which are receiving that,
and they need to do austerity, and they need to do the right things for their economy long
term. And why I’m hopeful is because actually, the measures that they’re taking are good
for their long-term productivity. So this, we’re talking about labor market reform.
We’re talking about making it cheaper to hire and fire people. We’re talking about
pension reform. We’re talking about limiting the power of wage increases and union strength
in several countries. And this is the stuff that’s going on in Spain and Italy in particular.
I think Greece is a bit more difficult. It’s a bit tougher doing the restructuring. But
certainly in Spain and Italy, we are off to a great start with the new governments that
we had. So I am quite optimistic for what they’re doing, and I feel that, when we
get through this crisis, we will be in a great shape, and we’ll be competitive.
And if I can draw one more parallel, it is similar to what Germany has done for the last
10 years, which was absorbing the East, doing their pension reform, limiting the power of
their labor unions, and restructuring their economy so that, like magic, they were posting,
you know, well above average GDP growth over the last few years. That just shows you the
strength of the reform measures that they’ve taken. This is the recipe for Europe, brought
to you by the German government. So, I’m quite optimistic that we’ll get through
this. And also, in a world that will have a lot of debt in a few years’ time, I think
Europe will look relatively clean, and restructured.
CONSUELO MACK: So, the political will, then, and the political wherewithal to restructure
in a positive way, is there? I mean, you sound much more optimistic than I’ve heard anyone
else sound. But also, a lot of the people that I talk to are analyzing the situation
from the States, and they’re not actually here in the trenches.
DEAN TENERELLI: I am an optimist, so maybe I am optimistic. But I feel the signs are
there that things are moving ahead at a good pace. And so, I am. I have to say, I am. It’s
not without risks. The principal risks, in my opinion, will be a big slowdown in the
economy. So, if the GDP growth decelerates because of austerity measures, that will be
a problem, because we’ll miss our targets. That particular is at risk, you know, in Spain
or Italy, where they’re really making a big chop at economic growth this year through
these austerity measures. So we have to get through this year, and it won’t be without
You know, and there are a number of elections that we need to get through. Everyone is telling
me that, you know, the way things look now, in all the elections, I think things will
fall into place. The governments will continue with the same measures which we’ve started,
without a shock to the Eurozone. So I really am a bit more constructive. It’s been, you
know, a tough couple years. But I think the signs are there that we’re doing the right
CONSUELO MACK: You have to invest in Europe, because you’re running a European fund.
But the rest of us don’t have to invest in Europe. So why should we even be bothered,
considering all of it, you know, at the very least, the headline risk that we’re hearing
DEAN TENERELLI: It’s very simple. Because over my career of investing, the time to invest
is when there’s crisis, and the time to invest is when there are stress points. And
in Europe now, there is a big stress point, and I think a lot of it is very misunderstood.
So there’s opportunity.
CONSUELO MACK: You mean the sovereign debt crisis.
DEAN TENERELLI: Sovereign debt crisis. A lot of it is misunderstood. And in the end, the
ECB has come through, as I’ve said. And I think it will continue. So investing in
stress points always means value, and you can see the market is cheap. It trades at
a big discount to the U.S. It’s, you know, just over 10.5 times PE. These are very cheap
multiples for Europe. You have great companies with good dividend yields, supported by cash.
No balance sheet risk. And growth. For the average European company, 50% of their revenues
come from outside of Europe. Something to keep in mind.
CONSUELO MACK: So there’s a global footprint by investing in European-based companies.
DEAN TENERELLI: There is a global footprint. Many European companies used to doing business
internationally from the beginning have positioned themselves well in emerging markets, well
in Asia. And for many of the companies, you know, consumer companies, just emerging markets
could be more than 50% of their sales. Which is quite a figure. And so, you can get very
good companies with good growth rates at very low multiples and great value right now. So
I think it is. And the time to do it is now, before everyone figures that out.
CONSUELO MACK: Among your peers in the market, you know, you are excelling. So what is it
that sets your fund apart from other European-based funds?
DEAN TENERELLI: I think what’s helped me is discipline and valuation, and discipline
in assessing which are the good businesses that I want to own, and spending all my time
focusing on trying to find them. So focusing hard on understanding why a company is able
to generate a return on capital much greater than its cost of capital over the long term,
and why that will continue for the next five, 10, 15 years. They’re the kinds of companies
that I want to invest in. That’s how I spend my day, talking with managements and understanding
why a cognac manufacturer can raise price nine percent last year when we’re supposed
to be in crisis.
CONSUELO MACK: And this is Pernod or…
DEAN TENERELLI: Well, they all did.
CONSUELO MACK: Oh, they all did.
DEAN TENERELLI: So, it’s Pernod. It’s Remi Cointreau. Both. So, it’s just understanding
why a company is a good business and why it’s great at what it does, and investing in them.
CONSUELO MACK: Now, one of the things that I know that Morningstar, the mutual fund analysis
firm mentioned in assessing the T. Rowe Price European Stock Fund, was that you invest in
small cap stocks frequently, and also in industrials. I mean, maybe that’s something that you’re
doing right now. But, the small cap opportunities in Europe, are there terrific ones?
DEAN TENERELLI: Fantastic. Fantastic.
CONSUELO MACK: And what is it about small cap that’s so appealing for you in the European
DEAN TENERELLI: I think small cap is an example of an exaggeration of risk aversion. So, when
the market gets risky, people get scared. They dump smaller stocks. They become very
cheap and very mispriced. On top of it, a lot of the sell side ceases to cover them,
because it’s not the most profitable business to cover small cap. So they’re very under-researched,
and they’re very mispriced. And I love mispriced companies that are good businesses, and I
think Europe in particular has a lot of good niche companies that might-- even if they’re
small cap or mid cap, they might dominate a specific area. They might be the number
one global provider of steam systems and manufacturing processes.
DEAN TENERELLI: Spirax Sarco. And you can buy that on 15 times PE. It is a 28% return
on capital employed company. It’s a fantastic business. And they are number one in what
they do, but they’re a mid cap company. They’re not a large company. And they’re
the kinds of things that I try to find and get into my fund, and hold onto for years
if I can.
CONSUELO MACK: And how important is the aspect of the family-owned business, and where you
have, you know, generations that are running the same kind of businesses? Is that very
common in Europe as well?
DEAN TENERELLI: It is common. And it is a theme. And I mean, I was doing meetings the
last couple days. I visited a number of family-run companies, like Pernod, like JCDecaux, which
are investing in their companies over the long term, and I find align their interests
with shareholders over the long term.
CONSUELO MACK: Because they are the shareholders as well.
DEAN TENERELLI: They are the shareholders. And they are building a business, and constructing
a good profitable business with strong market share positions over the long term. Sometimes
they’re willing to invest and hit the profitability. And they explain that to us, and if it sounds
reasonable, that’s a good thing. And we stay with it. We like this, and these are
the kinds of things that we, you know, seek to invest in, really.
CONSUELO MACK: And what about, you know, the dividend policy? I know your fund has, what,
about a two and a quarter percent yield.
CONSUELO MACK: So, you know, you’re a U.S. citizen, but are dividends more, you know,
favored here than they are in the States? Or, you know, does the policy differ? Or how
important is it for you?
DEAN TENERELLI: Dividends are interesting, because I think it is important. But I think
what’s most important is that a good company with high returns will generally generate
a lot of cash. So, how they use that cash is important. Ideally, investing back in a
business which is a high return business is the best outcome for shareholders in some
ways, because they can get a better return than I can with the dividend in some ways.
So I’m happy to let them reinvest in their business and to grow.
If, however, there aren’t the growth opportunities in any given year, or it generates so much
cash that they really don’t need to invest0which is fine with me, we’ll take the dividend.
So I think a dividend can be a symptom of a very, very good business, throwing off a
lot of cash, which is not capital intensive, and which therefore provides great shareholder
return as well, either through the dividend or through share price accretion. So, we like
CONSUELO MACK: Right now, according to Morningstar, one of your focuses is industrial companies.
So, why industrials? What’s the attraction there in Europe?
DEAN TENERELLI: Right. I think the industrials provide another example of what I just said,
which are European companies- great European companies- which have a great international
footprint and are benefiting by world growth, specifically in emerging markets. So in some
cases in Europe, you’ll be getting 40 to 60% revenue exposure in these companies into
emerging markets. They’re good companies with good technological advantages. They invest
in their R&D and have high returns. So I think they’re a very attractive area of the market
to be in.
They are not without fluctuations, and the economy accelerates and decelerates. But we
have, over the last even eight years, been adding to our positions in industrials, when
things looked like they were getting weak. Because we are a big believer still on the
industrialization of China, the industrialization of emerging markets. And these companies are
well-positioned through a profitable way to play this industrialization and growth.
CONSUELO MACK: So, in the United States, we have an impression that Europe is not business-friendly,
because of a number of factors, including, you know, labor unions and high tax rates
and bureaucracy. Is that a misperception?
DEAN TENERELLI: I think in some ways, yes, in some ways, no. I think there is a more
rigid labor market in Europe, and I think there are difficulties and expenses in hiring
and firing, and in social security contributions. So I do think that portion of it is something
that is being worked on now and needs to be changed. So I think that aspect of it is true.
But as far as, is it un-business-friendly? I think there are enough profitable companies
in Europe with great businesses that are doing quite well that would show that it isn’t
necessarily true on the other side.
CONSUELO MACK: Market correlation at one point went to one, in various stages of the financial
crisis and the aftermath. In that, no matter, you know, what your company was doing versus
another company, all European stocks got tainted with the same question went down- very frustrating
for investors and professional money managers, such as yourself. Has the correlation now,
you know, has it started to widen, in that quality companies are being recognized again?
I mean, do you feel like the markets are returning to some more sense of normalcy?
DEAN TENERELLI: I think that’s a very good point. And as a fund manager, it creates a
lot of worry, because you don’t understand, is it you? Or are you missing something? So
I think it’s a very valid point, and I think, yes. I think since the LTRO package, I think
the market is once again investing in stocks. And I feel that the movements in the market
are more rational. I do. I can see certain holdings of mine which have behaved in certain
ways, or PE multiples which are starting to get re-rated, and they are logical to me.
So I feel like the market is much more rational now than it was during the sheer panic time.
CONSUELO MACK: So your homework can pay off, which must be a relief, at any rate. So, let’s
talk about some of your holdings. And you’re pretty focused, relatively focused. You’ve
got 64 stock holdings. And your annual turnover is, what, 60%?
DEAN TENERELLI: Sixty percent, yes.
CONSUELO MACK: And so, which is lower than the average, but you’re still managing.
So that means that you’re holding a stock for a couple years?
DEAN TENERELLI: Yes. Just under.
CONSUELO MACK: Yeah. So, talk to us a little bit about a couple of the companies that would
be emblematic of the kind of investments that you’re making.
DEAN TENERELLI: I’ll talk about one which I bought recently, actually, which is an Italian
company called Tod’s, which is a shoe manufacturer and retailer.
CONSUELO MACK: Oh, sure. Tod’s. It’s very high end. Driving shoes. Right.
DEAN TENERELLI: High end. Right. Great products, great brand. However, it’s one in Italy,
which has been a market which has been difficult. Fifty percent of their sales are into Italy.
Seventy percent are into Europe. So the market has panicked on Tod’s, and the slowdown
that might ensue. They had a weak Q4, especially after the uncertainty around the Italian elections.
The consumer was very, very nervous, and did withhold on spending. And they had negative
like for likes. And, this is the kind of situation that we like to buy into. It’s a quality
company. It’s a company which will do 20, 26% EBIT margins. Fantastic business. They
are, again, a family-owned business, investing for the long term.
CONSUELO MACK: Self-financing?
DEAN TENERELLI: Self-financing, net cash. And you’re buying it now on 16 times PE,
for a company which, even in a bad year, like last year, will do 12% sales growth, a nine
percent organic sales growth. So it actually has a great growth outlook, has a great balance
sheet, investing for the long term, and has been absolutely slammed because of the worries
about the European consumer. And I know that we’ll get through it, and the brand will
be much stronger coming out of it. So, these are the kind of things that we like to invest
CONSUELO MACK: So that’s a consumer company. What about in the industrial space?
DEAN TENERELLI: Industrials, we’ve added to. We’ve been in industrials, as you’ve
mentioned and you know. Recently, I haven’t added to it. You needed to add to industrials
in November of last year, when the crisis was at its worst point. And, but the industrials
that I do hold, which was Spirax Sarco, which is the steam engineering company which I mentioned.
I also own SKF, which is a ball bearing manufacturing company based in Sweden. It is a quality business;
again, high return on capital business. Very well-exposed to emerging markets. Actually,
I did recently add to it. They had, again, a weak Q4 report, just on a slight slowdown
in China. And I added into that as well. So, SKF is another holding which I’m very comfortable
with, and has proved to be a great business over the long term.
CONSUELO MACK: So, is there any macro issue on the horizon? I mean, the markets seem to
be focusing on a given trouble spot at any time. Is there one trouble spot that you’re
seeing? You know, if Spain goes, if X goes, then we’ve got some real problems again?
DEAN TENERELLI: The thing that worries me most is the real economy, and what the effects
will be of austerity this year. What is being attempted in Spain- i.e. cutting the net debt
to GDP by such an extent in one year’s time- is tough. And I don’t think it’s ever
been done before. So these are significant changes which are going on in the real economy.
So we need to watch the GDP figures. A healthy world- the U.S. accelerating, China continuing
strong- will help Europe. They’re all open economies here, and they will benefit from
that. But what will worry me the most is that we sort of slip down into a downward spiral
on GDP growth, and then the debt targets are not made, and then you spiral down again.
So what I’m most concerned about is watching the economy.
CONSUELO MACK: So, Dean, the final question I always ask everyone on WealthTrack is, in
a long-term diversified portfolio, is there one thing that we should all own some of?
DEAN TENERELLI: Stock-wise, I knew you were going to ask this question, because I know
you. And I was preparing Tod’s for this, because I really think it is a business which
you can invest in and hold onto for 10 years, be comfortable that your returns will be managed
well, that it will be much bigger in 10 years’ time. The company will have expanded dramatically.
They will have grown dramatically in Asia, grown dramatically in the U.S., and expanded
the brands, even. So I am very comfortable with that stock, actually, and I think it’s
a great entry opportunity now.
CONSUELO MACK: Well, I am very comfortable with their shoes and handbags as well, I can
tell you that much. So, Dean Tenerelli, thank you so much for joining us, from the T. Rowe
Price European Stock Fund. And, you know, I feel much better having talked to you about
Europe, which I appreciate. And I’m sure I and our viewers will look at Europe again.
DEAN TENERELLI: Good. Thank you very much. It was a pleasure.
CONSUELO MACK: Thank you, Dean.
At the conclusion of every WealthTrack we try to leave you with one suggestion to help
you build and protect your wealth over the long term. This week’s Action Point is a
contrarian one. It is consider investing in some unloved European stocks. American investors
tend not to have enough foreign stock exposure to begin with, so this may be good time to
add an undervalued international component to your portfolio. And one of the most unloved
sectors of international stock markets is Europe. As Dean Tenerelli just pointed out,
many European companies are really global firms with more than half of their sales coming
from outside Europe. So a European fund is not only a way to participate in a long-term
European rebound, but it may also be a way of participating in emerging market growth,
since many European firms are strongly established around the world.
Next week we welcome Great Investor guest Kathleen Gaffney. But the co-manager of the
legendary Loomis Sayles Bond Fund says stocks are the next big thing. We’ll hear why she
is favoring dividends over interest for higher income. If you want to see our WealthTrack
interviews ahead of the pack, subscribers can do so 48 hours in advance- to sign up,
go to our website, You can also watch previous shows and find past One
Investment and Action Point recommendations. And that concludes this edition of WealthTrack.
Thank you for watching and make the week ahead a profitable and a productive one.
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