Wintergreen Fund, Inc. Releases its 2013 Annual Report and Shareholder Letter
Wintergreen Fund, Inc. Institutional Class (NASDAQ:WGRIX) and Investor Class (NASDAQ:WGRNX) is pleased to announce the release of the 2013 Shareholder Letter.
More information about Wintergreen Fund, Inc. is available at www.wintergreenfund.com.
Dear Fellow Wintergreen Fund Shareholder,
2013 seemed to be the year when the quality, valuations, and risks of businesses ceased to matter to most stock market participants. The Standard & Poor’s 500 Composite Index (“S&P 500”) remarkable rise for the year was its best return since 1997 during the run-up of the technology bubble. The ten best performing names in the S&P 500 had extremely high returns, while carrying an average price-to- earnings multiple of 58. Among these top performers were a struggling retailer (Best Buy Co., Inc.), a recently bankrupt airline (Delta Air Lines, Inc.), a brokerage still digging itself out from the financial crisis (E*TRADE Financial Corp.), a biotechnology company (Celgene Corp.), and two poster children of a potential new internet bubble (Netflix Inc. and Facebook Inc.). We believe the extraordinary returns on securities we view as highly speculative names are a microcosm of the broader market in 2013 — market participants moving down the quality spectrum in search of returns, without regard for and understanding of risks and valuations. We believe overseas securities languished and emerging markets became the scapegoat of popular opinion.
The widespread appetite for risk has been fueled in part by years of artificially low interest rates in most developed markets around the world. When safe high-quality assets yield a fraction of one percent, it isn’t surprising to see many investors flock to high-risk, high-reward investments, be it junk bonds or speculative equities. This is exemplified by high-yield bond spreads approaching historical lows, sub-prime mortgages being bid up 17% in the past year, and speculative equities posting triple-digit gains. Classic fundamental analysis of business values, a keystone in true investing, was replaced with an insatiable desire for returns at any cost and often a failure to acknowledge the inherent risk of many investment vehicles.
There is a popular Wall Street notion that momentum trading (i.e., buying stocks that have recently risen in price solely because they have recently risen in price) allows someone to hop from trend to trend as if they are a surfer riding the crest of a wave, and that this will enable one to trade their way to wealth. This “quick and easy” approach to speculating, which has been sold to investors in a relentless media blitz accompanying the latest bull market, is seldom successful in the long-run. More often, people don’t get just wet, but financially soaked.
Rather than risk our shareholders’ money by trying to deftly hop from one market fad to another, Wintergreen Fund, Inc. (the “Fund” or “Wintergreen”) prefers to avoid the clamor of the market and explore for valuable but unloved companies all over the globe. By owning companies which operate in nearly every geography and currency in the world, at any given moment the Fund typically has exposure to some markets and sectors which are performing well and others which are not. Over long periods of time, we believe this diversity of exposure has the potential to lead to solid results for shareholders, although we of course have no control over market sentiment in the short-term. As of year-end, the Fund had approximately 60% of its equity investments in companies outside of the United States. If we consider that many of the Fund’s U.S.-listed holdings do a significant portion of their business overseas, that proportion is even higher.
Although we currently believe that having significant exposure to the growing markets of the world should lead to outsized returns over time, that was not case in 2013. Global markets were led by rallies in the U.S. and Japan in 2013, two markets where the Fund has been (and remains) underweight. Outside of the U.S. and Japan, many global markets did little in 2013. Our lack of Japanese exposure and smaller U.S. exposure relative to most other mutual funds had been positive contributors to the Fund’s performance in past years, but this trend has reversed in recent time periods. Conversely, the Fund’s significant weighting in companies with exposure to emerging markets which had driven past performance has proven to be a drag on recent returns. We will remain consistent in our approach and not let ourselves be tempted to think we can time the market and trade our way to riches. We continue to believe that while the U.S. has a bright future, the opportunities are far more appealing beyond its shorelines. We hope our shareholders rest easy knowing that as they fall asleep each night, the Fund’s investments in companies in the Far East, such as Wynn Macau Ltd. (“Wynn Macau”) and Genting Singapore plc, have historically generated cash on shareholders’ behalf, and we believe that there is potential for this to continue. When you wake up the next morning, you can smile knowing that the Swiss companies in which the Fund has invested have been hard at work for hours, selling coffee, watches, and other goods.
At Wintergreen, valuations always matter, as do the underlying economic qualities of businesses and the management teams that guide them. While the Fund’s returns for 2013 did not match the returns of the major indices, we believe we achieved these returns while taking less risk. First and foremost, our aim at Wintergreen is to own companies which have enduring value and have generated high returns on equity without requiring significant debt. We do not invest in “lottery ticket” companies where there is the possibility of a triple-digit return but also the very real chance that the business will prove worthless. The Fund is full of businesses with solid underlying economics, many of which are conservatively financed with net cash on their balance sheets. At the same time, the businesses we own had an average return on shareholders’ equity that was significantly higher than the average S&P 500 company. We understand that our shareholders have worked hard for the money entrusted with us. We strive to provide a meaningful return on that money without taking excessive risks.
The Fund’s performance in 2013 benefited from strong returns from holdings in MasterCard Inc., Class A, Wynn Macau, and Franklin Resources, Inc. Securities that underperformed included Jardine Matheson Holdings, Ltd., and positions in both Schindler Holding PC and Imperial Tobacco PLC, which were sold during the year. The Fund also utilized forward currency contracts for hedging purposes which had an overall positive impact on performance during the year.
Wintergreen believes in our long standing trifecta of:
First, a business with good or improving economics, having often generated sales and profits in multiple currencies and jurisdictions;
Second, management that is working for the benefit of all shareholders and not just for its own short-term bonus; and
Third, the desired security being available at a compelling price.
These three factors are important aspects of our analysis of underlying business value. Nearly all of Wintergreen’s investments are in companies with excellent balance sheets and conservative accounting practices, which are growing globally, and often have significant stock buyback programs. We believe these attributes stack the deck in Wintergreen’s favor.
“Risk comes from not knowing what you are doing.”
Many people are suffering from widespread confusion in the market regarding the difference between volatility and risk. The minute-by-minute movement in stock prices that we can all see on our TV’s and smartphones is market volatility which captivates people’s attention. It is the fluctuation in market price of a security, often without a reasonable basis, and it is viewed more as entertainment than informed analysis. Volatility often reflects nothing more than the temporary mood of the market. Stock prices bounce around with the overall market, often providing investors with opportunities to buy or sell at a good price. Many people get swept away with the prevailing momentum, rather than focusing on the truly important values of the companies underlying the scrolling ticker symbols. Those market movements, however, often have little or nothing to do with risk.
Risk is meaningful, permanent, partial or total loss of capital; risk is not a temporary fluctuation in price. We believe that short-term under-performance of a portfolio of securities does not mean that investing in the portfolio is inherently risky, as long as the underlying businesses are undervalued and have strong enterprises with long-term potential. Many investors try to avoid all market volatility; Wintergreen seeks to use the volatility of the market to our shareholders’ long-term advantage.
Wintergreen is not an index fund. In fact, we believe it is about as far as one can get from an index fund in this day and age. With investments in 28 companies as of year-end, spanning from Switzerland to Canada to Hong Kong, and ranging from a microcap company to a $275 billion company, Wintergreen is a very actively managed and relatively concentrated fund. That does not mean that we are hyperactive traders; to the contrary, the Fund’s annual turnover has averaged less than 20% since its inception. We believe our shareholders are best served by assembling a collection of high quality and undervalued businesses. Once purchased, we prefer to let these businesses enjoy the prospective compounding effects of time, rather than trading in and out of them attempting to make a quick buck.
“Great minds have purposes; others have wishes.”
Nestlé SA (“Nestlé”) is an example of a high quality company which missed out on a big portion of the market’s rally in 2013. Nestlé isn’t just chocolate bars and candies, although they do own such brands as Baby Ruth, Butterfinger and Raisinets, along with SweeTarts and Gobstoppers. Nestlé is also Nescafe and Coffee- mate, Nestea, Nesquick, and Juicy Juice. In the ice cream segment, Nestlé is Edy’s, Haagen-Dazs, Dreyers, Skinny Cow, and of course Drumstick. Nestlé is also Stouffers, DiGiorno, and Lean Cuisine, along with Purina pet products and infant nutrition products such as Gerber. This is not a complete list of the Nestlé brands, but it is a good sampling that demonstrates the company’s purposeful role in feeding many people and their pets around the world every day.
Negative sentiment regarding Nestlé’s short-term revenue growth and profit margins contributed to a lackluster performance of their shares in 2013. Fear that a slow-down in emerging markets growth is permanent fails to acknowledge that there are billions of people around the world who want a better life and are now realizing they have an opportunity to more fully participate in consumer products that have long been available in the United States. Nestlé’s dividend yield, as of year-end, in the strong currency of Swiss Francs, is greater than both the current yields of one-year U.S. Treasury Bills (“U.S. T-Bills”) and the ten-year U.S. Treasury Note. Ironically, the majority of investors still favor lower-yielding fixed income investments that have almost no potential to appreciate. To combat these issues, Nestlé’s management has moved quickly to fix up or sell underperforming and non-core businesses, ranging from its Jenny Craig diet business to its share of flavoring company Givaudan. With over 40% of its revenue coming from growing emerging markets and a strong portfolio of food brands that provides the company with pricing power, we believe Nestlé will be a consistent performer for the Fund. With sentiment on Nestlé so poor, we saw a rare opportunity to initiate a position in long-dated call options on Nestlé shares at what we believe to be a very reasonable price. These options give the Fund the right, but not the obligation, to purchase Nestlé shares at any time before December 2017 at share prices of 60 and 68 Swiss Francs per share, not far from the 66.15 Swiss Francs per share where they finished trading in 2013. If Nestlé shares have even modest price appreciation by 2017, the Fund stands to reap a handsome return on the call options. Although these options carry more risk than simply owning the underlying shares, we believe the risk/reward equation is firmly in our favor in this case. Rather than let the whims of market sentiment dictate what we buy and sell, we instead aim to use this volatility to put cash to work in opportunities such as these Nestlé call options.
“Everything comes to him who hustles while he waits.”
-Thomas A. Edison
In 2013’s frenzy over ever-higher prices of speculative assets, very few investors were focused on the dollar bills lying in plain sight, waiting to be picked up at a discount. An example of this phenomenon was a classic arbitrage situation in the shares of NV Energy (“NVE”). In late May, NVE announced that it had agreed to be acquired by Berkshire Hathaway Inc. (“Berkshire”) in a $5.6 billion all cash deal. While NVE shares quickly rose to just below the acquisition price of $23.75 per share, the company stated an intention to continue to pay its dividends until the acquisition closed in several months. At a time when cash and short-term U.S. T-Bills yielded practically nothing, NVE shares offered an almost riskless 3.1% arbitrage yield.
With Berkshire standing ready with cash in hand, the only apparent risks to this arbitrage were that Berkshire could walk away from the deal or that the deal would not be approved by government regulators. Given Berkshire’s decades-long track record of seeing acquisitions through to completion and its $40 billion of available cash, we viewed the risk of them walking away as very low. We also considered regulatory approval to be extremely likely. Rather than earn 0.15% in short-term U.S. T-Bills, we deployed some of the Fund’s cash into NVE shares. When the acquisition closed on December 20th, NVE’s shares had realized a gain of 2.5%, including dividends, in just over six months, a nearly 5% return on an annualized basis. While that return pales in comparison to what the S&P 500 returned in 2013, we were pleased to have a low-risk “cash alternative” which offered a return far in excess of what was available from traditional cash instruments. We believe that the availability of such a rewarding arbitrage opportunity is an indication of many market participants’ preoccupation with high-risk, high-reward speculation in 2013. NVE was a classic non-correlated return opportunity; its return was completely independent of what the market was doing. When everyone is caught up in the exhilaration of a bull market, it can sometimes pay to take a close look at what has been overlooked and forgotten by others.
“A bend in the road is not the end of the road...Unless you fail to
make the turn.”
Sometimes Mr. Market offers long-term investors quality assets at distressed prices. We believe that now is such a time. Negative sentiment and excessive pessimism, in our view, have been plaguing Hong Kong and China for several months. This has opened up an opportunity for the Fund to buy Sun Hung Kai Properties Ltd. (“SHK”), the largest property developer and landlord in Hong Kong, at what we believe is a substantial discount to its net asset value. SHK is not a household name in the U.S., but consider this: think about prime office buildings and desirable residential towers located in central parts of the city that are closest to you, and you’ll get a picture of SHK’s business in Hong Kong as well as Shanghai, where the company is rapidly expanding its domain. With occupancy rates for its office and retail properties close to 100%, brisk demand for its apartments marketed to the mass affluent, and a full pipeline of new projects in premier areas, we believe that SHK is a package of solid assets that is trading at an attractive discount to its underlying value. Fears about a serious slowdown in China’s economy, as well as local government efforts to cool property price increases, have fed into the negative market sentiment. Another issue that has cast a shadow over the company is the Hong Kong government’s legal action that commenced two years ago against the co-chairmen of the company, brothers Raymond and Thomas Kwok. While the day-to-day operations of the company may not have been impacted, there has been an effect on investors who speculate about the impact on the company. Our view is that this legal issue has been discounted in the share price, and what we are left to analyze is the value of SHK’s enormous property holdings. When this fog lifts – and we believe it will – we expect SHK’s discount to net asset value to narrow, with the possibility of allowing Wintergreen’s shareholders to profit from this glaring mismatch between current market price and intrinsic value.
“It is not certain that everything is uncertain.”
Blaise Pascal was an amazing man who lived in Europe during the 1600’s and at the age of eighteen invented a machine that was able to add and subtract. In his early thirties, he wrote a mathematical treatise that is viewed by many as the foundation for modern work on probabilities. I suspect he would be amazed to see the far reaching impact of his work in places such as Macau. Geographically, Macau is a small peninsula jutting off into the South China Sea, just west of Hong Kong. It is the only place in China where casino gaming is legal, and until 2002, all gaming in Macau was under the monopoly control of one company. 2002 marked the end of the gaming monopoly in Macau, and Wynn Resorts, Inc. (“Wynn”) was granted a license to operate a casino on the peninsula. In typical Steve Wynn fashion, the company built the highest quality casino resort in Macau; Asian gamblers flock to Wynn in large numbers. Costing approximately $1.2 billion to build, Wynn Macau has generated so much cash that it has paid shareholders over $3.3 billion in dividends since its opening in 2006, a truly incredible return on its investment.
Casino revenue in Macau has proven resilient and has grown to over $45 billion per year, nine times as large as Las Vegas. With visitation and revenue growing, Wynn Macau has embarked on an expansion plan which will approximately double the size of its operations in Macau. Given the company’s valuation, we believe we are paying a fair price for the company’s current Macau operations and getting the future expansion for free. With Steve Wynn’s established record as a first rate casino operator and shareholder-oriented CEO, we look forward to being his partner in business for a bright future.
The Chinese government has limited the number of gaming licenses in Macau to six, creating the ultimate barrier to entry for competition. With three billion people living within a five-hour flight of Macau and competition limited, we believe that Wynn Macau has the potential to richly reward shareholders in the coming years. Wynn Macau carries net cash on its balance sheet and a compelling valuation, creating what we believe is a prime example of the low-risk, high-reward investment that we continually seek for the Fund. By investing globally in places such as Macau, we believe we are increasing the probabilities of long-term returns for Wintergreen shareholders.
“Courage is grace under pressure.”
The Coca-Cola Company (“Coca-Cola”) and Nestlé are examples of the world’s most valuable and enduring companies. Unlike some speculative companies whose stock prices soared last year, these two were largely ignored. With total returns for 2013 of 17% and 13% respectively (including dividends), Coca-Cola and Nestlé fell into the overlooked category. Rather than get caught up in the speculative frenzy which consumed much of the market, we used the relative weakness in Coca-Cola and Nestlé as an opportunity to add to the Fund’s positions.
In 2013, Coca-Cola was impacted by a new ‘soda tax’ in Mexico. While soda taxes make for attention grabbing headlines, we believe the underlying reality of Coca-Cola’s business is as strong as ever. Coca-Cola’s portfolio of drinks is extremely diverse in both brands and geography. In fact, of the 16 Coca-Cola brands that have over $1 billion in annual sales, only three (Coke, Sprite, and Fanta) are sugar-sweetened soft drinks. The majority of their $1 billion brands are comprised of sugar-free soft drinks, juices, teas, and waters. Beyond that, a sugar tax has been implemented in only one country, Mexico, and proposed implementation of such a tax in other countries has been met with firm resistance. While Mexico is a significant market for Coca-Cola, we believe the ultimate impact to the company’s bottom line will be muted as consumers there switch to sugar-free versions of soft drinks and other healthier Coca-Cola offerings.
Coca-Cola’s business is also affected by the volatility in emerging markets as it continues to grow its footprint globally and create shareholder value by streamlining its bottling operations in the United States and elsewhere around the world. The company has been a voracious buyer of its own stock and is in the midst of a share repurchase program totaling 500 million shares worth approximately $20 billion. We are happy to be buying shares alongside the company for a price which we believe will prove to be a bargain in the long-run.
As I wrote near the beginning of this letter, at Wintergreen we are thoughtful stewards of our shareholders’ hard-earned money. We are risk averse and believe our trifecta criteria, scrutiny of company information, and diligence are extremely important aspects to preserving and growing shareholder value. We sometimes forego the warm approval of consensus thinking. We take comfort in our belief that Wintergreen shareholders have the potential to grow wealthier over time because of our disciplined approach and diligent analysis. This is an exceptional time; we are finding quality assets priced at meaningful discounts with compelling long-term prospects.
Thank you. We appreciate your continued interest and investment in Wintergreen Fund, Inc.
David J. Winters, CFA
Before investing you should carefully consider the Fund’s investment objectives, risks, charges and expenses. This and other information is in the prospectus and summary prospectus, a copy of which may be obtained by visiting the Fund’s website at www.wintergreenfund.com. Please read the prospectus and summary prospectus carefully before you invest.
The Fund is subject to several risks, any of which could cause an investor to lose money. Please review the prospectus for a complete discussion of the Fund’s risks which include, but are not limited to, the following: possible loss of principal amount invested, stock market risk, interest rate risk, income risk, credit risk, currency risk, and foreign/emerging market risk. These risks include currency fluctuations, economic or financial instability, lack of timely or reliable financial information or unfavorable political or legal developments. These risks are magnified in emerging markets. Short sale risk is the risk that the Fund will incur an unlimited loss if the price of a security sold short increases between the time of the short sale and the time the Fund replaces the borrowed security. In light of these risks, the Fund may not be suitable for all investors.
For the period ending December 31, 2013, the Fund's Top Ten Equity Holdings were: Swatch Group AG *, 8.8%; Jardine Matheson Holdings Ltd., 7.0%; Berkshire Hathaway Inc., Class B, 6.2%; Franklin Resources Inc., 6.1%; MasterCard Inc., Class A, 6.0%; Compagnie Financiere Richemont SA, 5.9%; British American Tobacco plc, 5.6%; Reynolds American, Inc., 4.8%; Wynn Macau Ltd., 4.7%; Canadian Natural Resources Ltd., 4.6%. *Includes Swatch Group AG Bearer and Registered shares. Holdings are subject to risk and to change.
The S&P 500 Index is a broad based unmanaged index representing the performance of 500 widely held common stocks. One cannot invest directly in an index. Price to earnings ratio is the valuation of a company’s current share price relative to company earnings. Dividend yield discussed does not represent the Fund’s yield.
The views contained in this letter are those of the Fund’s portfolio manager as of December 31, 2013, and may not reflect his views on the date this letter is first published or anytime thereafter. The preceding examples of specific investments are included to illustrate the Fund’s investment process and strategy. There can be no assurance that such investments will remain represented in the Fund’s portfolios. Holdings and allocations are subject to risks and to change. The views described herein do not constitute investment advice, are not a guarantee of future performance, and are not intended as an offer or solicitation with respect to the purchase or sale of any security.
Foreside Fund Services, LLC, distributor.
WINTERGREEN FUND, INC.
NASDAQ: WGRIX, WGRNX