Mark Foley & Tina Larsson's Pendo LLC: International Value Investing

Today we're taking a look at the latest commentary from Tina Larsson and Mark Foley's investment firm, Pendo LLC. Pendo seeks absolute returns (or as they put it, "We don't hug an index") through in-house bottom-up fundamental analysis in order to find undervalued companies outside the United States while remaining agnostic regarding market cap, industry, sector, geography, traditional weightings, etc. As of the end of August, Pendo's International Strategy Fund was -5.34%. Their trailing twelve month return is 8.83%.

In the letter, Larsson and Foley note that despite tumultuous and volatile world markets, they remain quite optimistic about the future of their international investments, and not just for the long term, as they believe their investments will out perform their benchmark indices over the next 6-12 months. While not satisfied with their recent performance, they believe their strategy is now ready to outperform as the global economy improves and they continue to hold businesses that are insulated from the ails of the US market and dollar.

Their portfolio is currently trading at 13.5x trailing earnings, down from an ~18x multiple at the beginning of the year. A PE expansion back to previous multiple would provide a 33% return on its own. They believe this is reasonable considering that the MSCI EAFE benchmark currently only trades at ~20x but has traded at an average PE ratio of ~25.5x real earnings since 1982. Larsson reiterates that they are not market timers, but they remain committed to actively managing their long-term value approach by reducing positions as they become over-valued while increasing positions that become undervalued.

As of August 31st, Pendo International Strategy's top ten holdings are as follows:

1. Sichuan Expressway (China)
2. Tsingtao Brewery (TSGTY)
3. Canadian Natural Resources (CNQ)
4. Hong Kong Exchanges & Clearing (Hong Kong)
5. Philip Morris International (PM)
6. JSE Ltd (South Africa)
7. CEMIG (Brazil)
8. CNOOC (CEO)
9. Anglo American (UK)
10. Silver Wheaton (SLW)


Pendo's Global Value Strategy holds different names and here is their top ten:

1. BM&F Bovespa (Brazil)
2. Deluxe Corp (DLX)
3. McDonald's (MCD)
4. Sanofi-Aventis (France)
5. Vodafone (VOD)
6. Walt Disney (DIS)
7. Canadian Natural Resources (CNQ)
8. Newmont Mining (NEM)
9. Philip Morris International (PM)
10. Leucadia (LUK)

There are some names worth highlighting above because Warren Buffett's Berkshire Hathaway has been fond of Sanofi-Aventis. Additionally, David Einhorn's hedge fund Greenlight Capital has a large position in Vodafone (VOD) and you can see their investment thesis here. In terms of overlap between both of Pendo's portfolios, Philip Morris International (PM) and Canadian Natural Resources (CNQ) are found in both strategies.

The second half of Pendo's letter focuses on recent developments in China where the visiting Premier Wen Jiabao addressed the need for political reform, or more specifically, the need to curtail excessive political control. Such sentiment reassured Larsson that China understands they will have to continue to allow more freedom in the marketplace in order for China’s 30+ years of overall growth and development to continue.

Larsson and Foley feel that centralized planning can work very well in steering a nascent economy towards a more developed, functioning entity. Yet, she also acknowledges that, “in order to fully develop and remain an expanding, dynamic, and innovative powerhouse, free markets must be respected and embraced.” Like China, Brazil is another country that has benefited from starting to separate itself from socialism, as GDP growth is expected to be a robust 7.34% in 2010. Brazil is becoming a global leader through providing financial and technological aid to developing countries, and thus building good will and valuable trading partners (Larsson notes that these developing countries are notably commodity-rich).

Pendo cites a quote from July 17th issue of The Economist to drive home their point: “This aid effort—though it is not called that by the government—has wide implications. Lavishing assistance on Africa helps Brazil compete with China and India for soft-power influence in the developing world. It also garners support for the country’s lonely quest for a permanent seat on the UN Security Council. Since rising powers like Brazil will one day run the world, argues Samuel Pinheiro Guimarães Neto, the [minister for strategic affairs], they can save trouble later by reducing poverty in developing countries now.”

Embedded below is Pendo's latest commentary:



You can download a .pdf copy here.

We almost exclusively cover fundamental bottom-up stockpickers and you can follow our coverage of these hedge funds and their investments here. For more commentary and market analysis, head to our compilation of recent hedge fund investor letters as well.

Top 10 Highest Paid CEO's of 2008: A Closer Look

This post will surely outrage a few people. The Associated Press has gone through the various proxy statements filed from the first of the year until the end of April and has analyzed the highest paid CEO's in the S&P500. So, firstly, we'll present their list of raw data. Secondly, we'll also make a few calculations of our own below where we determine just how much each CEO was compensated for each percentage point their shares dropped over the course of 2008.

Without further ado:

Top 10 Highest Paid CEO's of 2008

1. Aubrey McClendon (Chesapeake Energy - CHK): $112.5 million

2. Sanjay Jha (Motorola - MOT): $104.4 million

3. Robert Iger (Walt Disney - DIS): $51.1 million

4. Lloyd Blankfein (Goldman Sachs - GS): $42.9 million

5. Kenneth Chenault (American Express - AXP): $42.9 million

6. Vikram Pandit (Citigroup - C): $38.2 million

7. Steven Farris (Apache Corp - APA): $37.2 million

8. Louis Camilleri (Philip Morris International - PM): $36.9 million

9. Kevin Johnson (Juniper Networks - JNPR): $36.1 million

10. Jamie Dimon (JPMorgan Chase - JPM): $35.7 million


Let the riots begin. First, let's start by examining the requisite financial company CEO's. It is obviously astonishing that Vikram Pandit of Citigroup, Lloyd Blankfein of Goldman Sachs, Ken Chenault of American Express, and Jamie Dimon of JPMorgan are even on this list at all whatsoever. Sure, their pay packages were most likely negotiated long before the financial crisis. But, even so, it is borderline ridiculous that they earned so much for causing shareholders so much pain. Vikram Pandit's Citigroup common stock lost almost 75% in 2008 and for that awesome accomplishment he was compensated over $38 million dollars. Sure, he has "righted a wrong" (and that is a stretch calling it that) by taking a $1 salary and no bonuses until Citi is profitable again. Yet, his appearance on this list will surely outrage many. Surprisingly (or unsurprisingly?) no one mentioned above graces Time's list of 25 people to blame for the financial crisis.

To take things a step further, we wanted to illustrate just how truly ridiculous things are by doing a quick calculation. Below, we came up with a rough estimate of how much each CEO was compensated for each percentage point their stock decreased over 2008. If you were angry before, you'll surely be outraged now:

CEO Compensation Per Percentage Point Decline in Their Company's Stock

1. Chesapeake Energy - CHK: Aubrey McClendon made around $2,008,928 for every 1% his stock dropped, giving him a total salary package of $112.5 million based on CHK shares being down around 56% for 2008.

2. Motorola - MOT: Sanjay Jha earned around $1,491,428 for every 1% his stock dropped, giving him a total salary package of $104.4 million based on MOT shares falling around 70% for 2008.

3. Walt Disney - DIS: Robert Iger earned around $1,965,384 for every 1% his stock dropped, giving him a total salary package of $51.1 million based on DIS shares declining 26% over the past year.

4. Goldman Sachs - GS: Lloyd Blankfein made around $726,379 for every 1% his stock dropped, giving him a total salary package of $42.9 million based on GS shares being down around 59% for 2008.

5. American Express - AXP: Ken Chenault made around $691,935 for every 1% his stock dropped, giving him a total salary package of $42.9 million based on AXP shares being down around 62% over the course of last year.

6. Citigroup - C: Vikram Pandit made around $509,333 for every 1% his stock dropped, giving him a total salary package of $38.2 million based on C shares being down around 75% over 2008.

7. Apache Corp - APA: Steven Farris earned around $1,377,777 for every 1% his stock dropped, giving him a total salary package of $37.2 million based on APA shares decreasing around 27% for the last year.

8. Louis Camilleri (Philip Morris International - PM: Louis Camilleri earned around $3,690,000 for every 1% his stock dropped, giving him a total salary package of $36.9 million based on PM shares sliding only around 10% in 2008.

9. Juniper Networks - JNPR: Kevin Johnson earned about $802,222 for every 1% his stock dropped, giving him a total salary package of $36.1 million based on JNPR shares sliding 45% over the last year.

10. JPMorgan Chase - JPM: Jamie Dimon made around $1,298,181 for every 1% his stock dropped, giving him a total salary package of $35.7 million based on JPM shares being down around 27.5% for 2008.


Please be aware that these are merely rough estimates made by using the compensation estimates provided by the AP and a rough gauge on how well each stock performed over the course of 1 year. We did not take into consideration any salary re-negotiations, give-backs, or other actions that might have been taken by CEO's in an effort to try and make their ludicrous pay seem "not as bad." So, while these numbers may be slightly crude, they will certainly energize angry shareholders that much more.

Let's dive into some of these numbers. Jamie Dimon's number seems artificially high mainly because his stock only fell 27.5% for 2008 compared to the catastrophic drops seen at Citigroup and other financial institutions. So, while he definitely earned a lot of money, his shares did outperform their financial peers. Louis Camilleri of PM also earned a hefty sum for each 1% decline in shares of his company. But, you also have to consider that PM shares only slipped around 10% in 2008. Sure, a loss is always a bad thing. But, all things considered, their shares were barely down at all compared to the S&P's monumental losses.

Lastly, we want to focus on Aubrey McClendon of Chesapeake Energy; he has a very interesting story, to say the least. He is number one on the compensation list and his guidance led to a 56% decrease in CHK shares over the course of 2008. And, better yet, he was even margin-called on his own company's shares, as he had been buying tons of CHK on the way up with leverage. As shares of CHK began to tank, the margin clerks forced McClendon to liquidate his shares in a capitulative sort of event. What is even more asinine about his particular situation is that the board of Chesapeake has essentially "rewarded" Aubrey in terms of compensation (no doubt as a means of helping him recover from his margin-call debacle).

That's borderline ridiculous. The man lost shareholders a ton of money and he himself felt the same pain the shareholders did. Yet, his company said "thank you" and essentially bailed him out of his mess, loosely speaking. Shareholders are undoubtedly wondering why they weren't bailed out by the board too. Don't get me wrong, McClendon is definitely top notch when it comes to management teams of public companies. But, does he deserve this kind of preferential treatment? I'm sure everyone out there (that is, except Chesapeake's board) shares the same opinion we do.

This list merely turns the spotlight (yet again) to executive pay. This has long been an issue on Wall Street and with companies in general. But, instead of making progress on the matter, we continue to drift along with no real change. We here at market folly are certainly left wondering what is taking so long. After all, this list is yet another piece of evidence that drastic change is needed in the realm of executive compensation as it relates to performance.

Underperform? No problem, here's a sh*tload of money for your time. Outperform? Great! Here's some money for your time, and here's even more money for doing what you were supposed to do in the first place. Great doing business with you, see you next year!


CEO pay source: AP via NYT