Losing the Battle, But Winning the War



For Charles Lahr, Pimco’s deep-value equity portfolio manager, Europe has served up the best and the worst over the past decade. How will his U.S. bet fare?

My Best: What Tech Analysts Didn’t See

Euronext, the European cross-border securities exchange, is among Charles Lahr’s best investments. He bought a stake in 2003, for around 20 euros per share. The world was just coming off the bear market of 2001-02, and trading volumes were picking up. But most of the investing world didn’t notice Euronext’s potential. It was covered by technology analysts instead of financial services analysts, and the broad investing public didn’t even associate the name with a stock exchange.

All the while, Euronext was integrating its cash and derivates trading markets and clearing services throughout Europe. By 2006, it had double-digit trading volume growth, net profit growth of 51% compared with the previous year, and margins in the 40% range.

When NYSE bought Euronext in 2007, at around 90 euros a share, beating out Deutsche Boerse, Lahr almost quintupled his investment over a four-year period.

But he believes that such five-baggers would be hard to come by in the current stock exchange consolidation round. “Five or six years ago, the stock exchanges were a growth business,” he says. “A case for secular growth is picking up again now, but the rationale for combinations these days is streamlining costs and achieving global reach.”

And looking back at the fight for Euronext back in 2007, Lahr points out that if Deutsche Boerse actually consummates its deal with New York, it’s going to be buying Euronext at a cheaper valuation than it could have in 2007, when it lost the contest to New York.

“Although they might have lost the battle, Deutsche Boerse might ultimately win the war,”says Lahr.  

My Worst: Beware of Those Reaching for Pure Yield

The Northern European banking sector is one of Lahr’s worst calls. One example is Fortis, a Dutch and Belgian banking and insurance firm. Lahr bought it in 2004 and exited the position in the late summer of 2008, before the bank was partially nationalized and broken up. But not soon enough to avoid losing half of his investment.

Although Lahr, quite correctly, tried to avoid getting involved in the subprime mortgage mess, he didn’t see how far the disease had spread. “I never thought it would have gotten as big as it did and find itself as embedded in European banks as it was,” he says.

For many years Fortis was an incredibly safe business, with a high-quality Belgian retail business and a well-run insurance unit. But the northern part of Europe operated in a low-margin environment for many of its loans. To compensate for that, northern European banks bought higher-margin, higher-spread products like subprime mortgages.

Lahr recalls reading a soothing paragraph from the prospectus for the acquisitionof ABN AMRO by Fortis, the Royal Bank of Scotland and Banco Santander in 2007, the acquisition attempt that led to the unraveling of Fortis. It said very clearly under disclosures: no meaningful exposure to subprime lending.

The lesson: “Always be suspicious when you find an investor or a company reaching for yield, trying to be smarter than the market,” says Lahr. 

My Next : The Sum of Parts Worth More Than the Whole

Not only are U.S. blue chips the cheapest they have been for years, says Lahr, but he also sees a lot of triggers that are a magnet for shareholder value, such as spinoffs, split-offs and mergers.

Pfizer (PFE) is a good example of this trend. Pimco bought it in the late summer of last year, and Lahr still sees lots of upside in it. The value of the individual businesses that roll up into Pfizer are worth far more than what the company trades for today, he says. The company has started to monetize its assets already with the deal in April to sell off its Capsugel business to private-equity firm Kohlberg Kravis Roberts for $2.4 billion.

Pfizer’s former CEO, Jeff Kindler, who led the acquisition of Wyeth, resigned last December. The new chief executive, Ian Read, is selling assets, a course of action that Lahr applauds: “They are actively looking at ways to increase value to shareholders,” he says.

Lahr points to other companies that are pulling the trigger to release shareholder value, includingWilliams Cos. (WMB), which is breaking up its pipeline business as well as other businesses within it, and Marathon Oil (MRO), which is looking at asset sales. 

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: MRO , PFE , WMB

Kasia Moreno

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