THE LIFE (AND STOCKS) OF BRIAN AT FIDELITY, THE DEFECTION OF BRIAN POSNER WAS A PARTICULARLY HARSH BLOW. FOR WARBURG PINCUS, WHICH NABBED HIM, IT WAS AN UNQUALIFIED COUP.
(FORTUNE Magazine) – The first question everyone asks--why did you leave Fidelity?--is a fastball down the middle, and Brian Posner's bat is swinging before the words are out of your mouth. "Fidelity is a wonderful company, but Warburg Pincus gives me the opportunity not only to run money but also to play a role in building a business."
Okay, so he's smooth. Thing is, the 35-year-old Posner also isn't half bad as a fund manager. At Fidelity his $15.6 billion equity-income fund was always among the top five in its peer group, generating an average annual return of 16% during the 42 years he was at the helm. Since he took over the $540 million Warburg Pincus Growth & Income Fund on January 9, 1997, the portfolio has undergone a 95% overhaul.
What does the new portfolio look like? More to the point, how does a money manager build a portfolio and invest capital during a period in which 100-point swings in the Dow seem to be the rule rather than the exception? I recently dropped by Posner's new Manhattan digs to find out.
Brian, was the move from Boston tough?
I had been with Fidelity for almost ten years, so I prepared myself for difficulties--emotional and otherwise--but they never happened. Everyone's got the same technology, and Warburg is a collegial place where everyone shares ideas. I need to understand each analyst's biases, and they need to know mine. We're getting there.
What are your biases?
I'm a value guy. For me that means taking an individual company and looking at its current and prospective earnings and cash flows, its return on investment and equity, the volatility of those returns, the risks, and all the other pieces, and then putting them together and asking: If I were the only shareholder, what sort of returns would that enterprise give me? It's absolute rather than relative analysis. It doesn't mean buying the cheapest quartile in the market or the cheapest stock in a group based on the P/E or price-to-book ratio. It's not saying ABC Co. is a buy because it's selling at ten times earnings in an industry where the average P/E is 20.
So you're not buying Chrysler because you think it's the cheapest auto stock?
Right. I don't pick a Chrysler over a Ford. I try to understand what's going on in the industry and then look at each company on an independent and separate basis.
And you wind up with Chrysler as your largest holding and Ford as your seventh largest.
Yes. Both will be propelled by developments within the auto market, but each is interesting for its own reasons.
Take us through them.
Chrysler is one of the more stunning turnarounds the country has seen in the past six or seven years. After being on the verge of bankruptcy for the second time in a generation, it has demonstrated an ability to generate a significant amount of cash. It has net cash on the balance sheet, it's buying back gobs of stock, and it's still coming out with new models. As it gets through the current rough patch and continues to generate good returns, I'm betting that its valuation dynamics will undergo a dramatic change.
Is that another way of saying the world still sees Chrysler as a troubled company?
The world sees it as a classic cyclical that deserves a cyclical multiple, but I'd argue that other cyclicals have made the transition and have been rewarded. Caterpillar and Deere are examples. Neither had a gangbusters 1996 in revenues, but both generated good earnings and cash flows. As a result, Caterpillar and Deere now trade at double-digit P/Es, while Chrysler still sells at five or six times earnings.
Tell me about Ford.
Ford is earlier in the restructuring process. The most important task facing the company is showing that it can manage the auto cycle. To me, managers demonstrated how well they understood this when they killed the Thunderbird and a couple of other models that weren't selling. They've also shown an understanding that they've got assets that don't belong. They sold a chunk of Associates, their lending and finance subsidiary, last year, and there will be a public offering of Hertz soon. Given the balance-sheet value of Associates, Hertz, and Ford Credit, I could argue that I'm not paying anything for the U.S. auto operations.
But isn't that relevant only if Ford were to liquidate or actually spin everything off?
Right. It's not the way to buy a stock. But when I have net-asset-value support, and when I see Ford taking steps that give me confidence it's moving in the right direction on operations, I don't think I'm taking excessive risk with the stock at $34.
Do you have a target when you buy a stock?
The ideal situation for me is one in which I know there's a reasonable base on the downside if things don't work out, and unlimited room on the upside. The difficulty with value investing is uncertainty in the timing of the upside. I've owned British Petroleum since 1992, when the stock was in the low 40s. There was no way of knowing then it would be worth $140 a share today. But as it restructured and started paying down debt, you could begin to see the power of the underlying operations and the operating leverage within the company. This is something that feeds on itself. When management discovers what they can do, they usually discover they like it and keep pushing.
Do you invest with a time frame in mind?
I'm looking at a 12- to 24-month period but not at a fixed target. As a stock appreciates--and this is the ideal situation, of course--you have to constantly reassess what's going on. When I initially purchased BP, I did it on the basis of liquidation analysis: If the stock were liquidated, I would get in excess of $50 a share. As it moved into the 50s and the restructuring began to take hold, I went to a going-concern analysis and then to a growing-concern analysis. Today BP has one of the best returns on employed capital in its industry and one of the best production profiles. It's also one of the few free-cash generators. I was taught that stocks make major moves not because of momentum or good-looking charts but because of improved fundamentals.
How did you react during the recent 100-point down days?
If a stock goes down but the fundamentals are unchanged, I don't sell. Day-to-day movements in a stock don't mean anything. So I spent most of the time looking for companies that had gotten unduly punished. For instance, I swapped Schlumberger for Transocean Offshore. Schlumberger is as solid as a rock, but I was able to replace it with a company that has greater operating leverage and was selling at a more attractive valuation. It was a way of lowering risk, which is what portfolio management is all about.
What's your thinking on Philip Morris and RJR Nabisco, both of which are among your ten largest holdings?
Philip Morris is still the premier company in an industry that has figured out how to grow revenues and earn significant returns in an environment where consumption is declining, and RJR Nabisco is a long restructuring that's working out. Short of an outright ban on cigarettes, both can withstand a scenario in which there are advertising restrictions and a $300 billion settlement, whether it's in the form of a lump-sum payment, a larger excise tax, or whatever.
The fact that the parties are sitting down and discussing a means of resolving the litigation is a positive. That said, you have to expect it will make the situation more volatile, because there will be lots of posturing and negotiating in the press. You have to be prepared for that.
Is Raytheon another restructuring?
Yes. There's a lot of noise buzzing around Raytheon right now because it's about to acquire the defense businesses of Texas Instruments and Hughes Electronics. Rather than analyzing it on the basis of pro forma financials, I'm focusing on the cash flows associated with the mergers themselves and the restructuring cash outflows that will occur in 1998 when it sells its appliance business and does something with its engineering and construction business. On that basis, I can see downside support for the stock in the low to mid 40s. It's currently around $43.
What's the upside?
Raytheon is buying highly cash-generative businesses. Management is talking about restructurings that are going to yield hundreds of millions in cost savings. And they're talking about revenue synergies that are hard to quantify but potentially large. It reminds me of what happened immediately after the Lockheed-Martin Marietta merger--lots of noise, lots of confusion, and lots of misunderstanding about the next steps. A few quarters later people suddenly realized the cash flow power of the company. You could start blue-skying a scenario here in which a Raytheon that has struggled the past couple of years could become a significant cash generator and report revenue surprises on the upside. It's not unreasonable to assume that the company could earn $3.90 to $4 a share in 1998. If you were to give that a 13 to 14 multiple, you could see the stock selling in the low to mid 50s.