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    Guest Interview:

   Brandes Investment Partners, L.P.

    11988 El Camino Real, Ste. 600
    San Diego,CA 92130

    Telephone: 858.755.0239
    Fax: 858.755.0916


    Interview Quarter: 4Q1995

 Barry ONeil

 Managing Director

Q: Barry, how many investment portfolios do you offer clients and how do their styles differ?

A: We have five: International Equity, Global Equity, Domestic Equity, Global Balanced and International Small Capitalization. All of them utilize the classic Graham-Dodd-Brandes philosophy of bottom-up value investing. What we're looking for are relatively large, well-managed, well-financed firms whose stocks are temporarily undervalued by, say, 30% to 40%. We buy them at these low prices and then wait - sometimes 3 to 5 years - for the market to recognize and pay their intrinsic, fundamental values. Essentially, we buy businesses to hold, not stocks to trade. We search for low ratios of price/earnings, price/book value, price/cash flow, and debt/equity. To assure diversification, we place no more than 20% of an account in any single country outside the US, no more than 20% in one industry, and no more than 5% in any one stock. International Equity is by far our most popular portfolio. It contains exclusively foreign stocks. Global Equity is our oldest product, going back over 20 years. It combines domestic and foreign stocks. That allocation will depend on where we can find the greatest opportunities for undervalued securities. Domestic Equity is a brand-new product, comprised exclusively of US equities. Global Balanced is our only portfolio that includes fixed-income instruments - usually bonds, but occasionally preferred stocks. The bonds are normally treasuries, but are sometimes agencies and rarely AAA-rated corporates. International Small Capitalization, or ISC, is the newest member of our portfolio family. It's limited to foreign stocks with $1 billion or less capitalization. Since more risk is involved, it's restricted to investors with about $1.5 million or more assets, of which a minimum investment of $250,000 is required. It also requires a custodian who has trading capabilities to execute such issues. (Minimum investment for the other 4 products is $100,000 each.)

Q: Would you please give us an overview of your investment philosophy?

A: Mr: O'Neil: We follow the Graham-Dodd-Brandes method of bottom-up value investing. This philosophy was first enunciated by Professors Benjamin Graham and David Dodd in their seminal book, Security Analysis, 60 years ago. The method was updated and expanded, particularly for international investing, by Charles Brandes in his 1989 book, Value Investing Today. Essentially, we see that the stock markets are highly emotional, even sometimes irrational, and this provides great opportunities. Thus, prices of certain stocks will, from time to time, be depressed through no fault of their own. It is those stocks that we seek, especially if the companies are large (our average market cap is $10-$12 billion per company) and well managed. We generally prefer to see steady-growth companies with balance sheets we understand, like telephones, instead of high-technology firms, and new issues. The reason, to us, is obvious: high technology entails predicting the future. For example, will this new gee-whiz, jim-cracky widget actually perform as promised and, more important, will it sell? So, ultimately, our approach is very conservative, relying on past and present performance and abstaining from forecasts. International investing has been the traditional domain of banks with international contacts.

Q: How did you develop an interest in international markets?

O'Neil: That's an interesting question. The fact is, international is where the opportunities are increasing. About 20 years ago, the whole world's total market cap - that is, the value of all companies - was just over $1 trillion, of which about 2/3 was in the US. Today, total market cap is over $12 trillion, of which 2/3 is foreign. And that trend is increasing. Also, most large companies in most categories - like banks or chemicals or textiles - are international, not American. Plus, the best-performing stock markets during the past 12 years or so were never the US, but included countries like Hong Kong, Mexico, and Austria. So, an investor who ignores international investing is passing up 2/3 of his/her opportunities. That's why we're interested in it and have been doing it for 20 years.

Q: Two main concerns come to mind when investing overseas. How do you handle accounting differences and currency fluctuations?

A: O'Neil: Contrary to popular belief, the easiest to handle are currency fluctuations. Many investors, and even some brokers and consultants, assume that all currency moves are bad. But when you think about it, roughly half such fluctuations are good, almost by definition. Also, when a given amount is invested in at least 5 different countries, as ours are, that very diversification helps minimize any adverse effects between countries. Lastly, currency fluctuations are usually short-term, a matter of days or weeks or, at most, months. Whereas, we hold stocks about 3 to 5 years, which obviates any need for currency hedging. Just review our results vs. those that hedge. Accounting differences are more difficult, and this is where our research analysts come into play. It's true that many other countries do not follow the same GAAP (general accepted accounting procedures) that we do in the US, so our regional and industry analysts try to understand the differences. For example, foreign companies' reports often finagle their earnings - either hiding them for lower taxes or inflating them to attract investors. Our analysts zero in on the cash flow, which is much more difficult to finagle and thus is far more indicative of business reality.

Q: How difficult is it to get accurate information when reporting standards are different from our own?

A: O'Neil: It varies, from easy to exceedingly difficult. It seems to depend upon each company's management rather than on national or regional or industry differences. Before we select a stock - that is, during the research or data-gathering phase - one of our analysts will call or visit the candidate company to interview management. Those responses, including negative or non-responses, are factored into the decision made by the Investment Committee. To what would you attribute the dramatic rise in interest for international investing by US investors? O'Neil: Our experience has been that investors are just more and more aware of increasing opportunities abroad. Part of this rising awareness is due to education by us and other international money managers. Part is because of the collapse of the U.S.S.R. and Communism in 1989-91. There are now 20 odd additional capitalistic economies, each with corporate stock investment possibilities, where a few years ago there were none. In addition, nations that have never been communist, like Mexico, are privatizing governmental bureaucracies at an accelerating pace. Mexico has, for instance, already privatized its telephone system (TELMEX) and will soon privatize a portion of its petroleum industry (PEMEX). The bottom line is that it doesn't take long for smart investors (our clients, of course) to realize where the best deals are.

Q: With so many economies around the world, how do you pick the best markets?

A: O'Neil: We don't. We let the stocks pick them for us. This may sound flippant, but it's true. Picking "the best markets" is a top-down decision, anathema to our bottom-up philosophy. We look for undervalued stocks wherever they are, provided we don't transgress our maxima of 20% each country/20% each industry/5% each security per account. Our method does, in fact, work. Instead of choosing a country, then an industry, then a stock, we simply pick the best stocks. Period. This often allows us to buy stocks and enter countries several years ahead of the crowd. For example, this approach caused us to buy TELMEX several years ago at $1-$3, when everybody else thought we were nuts and told us so. On a converted basis it's now selling over $35 and was over $76 last year

Q: Do you buy most of your stocks in the US market or do you go offshore to buy them in their home countries?

A: O'Neil: For international (i.e., foreign) stocks, we buy all of them, 100%, in ADR's (American Depository Receipts) for the "wrap" or subadvisory accounts. This is a requirement of the wrap program broker-dealers, since ADR's trade and clear just like domestic stocks. For our private clients or "full service" accounts, we buy 80%-90% ADR's and the rest in foreign ordinaries. Obviously, this requires that we trade in foreign markets like Hong Kong, which means our trading department may operate 24 hours a day, but it's worth it if we can provide value to our clients' portfolios. By the way, there are now about 1,300 ADR's worldwide, and the number's going up by 100-300 per year.

Q: Your emphasis is on value investing. Please tell us what that concept means to you.

A: O'Neil: Value investing, in everyday language, means buying good stocks cheap. This is not as easy as it sounds. If it were, everybody would do it. For example, companies in Chapter 11 (bankruptcy) usually have cheap stocks, but there's little value there. We're looking for large, well-managed companies with temporarily cheap stocks that will bounce back. An example is the S&L (savings and loan) industry. A few years ago, all stocks in the industry were depressed because a few S&L's did not mind their P's and Q's. We saw an opportunity and bought some good S&L's cheap. Their stocks later rebounded, and some restructured themselves as mutual banks providing even greater opportunities. Truth be known, it's very difficult to find such companies, choose them carefully per our criteria, and then hold them through thick and thin for as long as 5 years, until the market recognizes their intrinsic, fundamental values.

Q: If markets are efficient, as many claim, how can stocks sell below their real value?

A: O'Neil: They can't. And markets are not efficient. This basic fact of life is what keeps us in business and what made Ben Graham wealthy. The market is definitely not fully efficient. To the contrary, it's highly emotional and illogical. Investors often buy high and sell low because they panic and see other investors do the same thing. That's why some people call us "contrarian" - we don't try to be, but we're often buying when others are selling, and vice versa. Back to market theory: it might be, say, 75% to 85% efficient - definitely not 100% - and that remaining 15% to 25% provides a lot of investment opportunities for astute observers with lots of courage. Foreign markets are even less efficient than the US market.

Q: Your second largest portfolio is the Global. Would you tell us how its objectives differ from your international portfolio?

A: O'Neil: The objectives of our Global Equity portfolio are the same as our International Equity portfolio. That is to make as much money as possible for our clients while minimizing risk. And indeed, over the past 5 full years, both products have shown higher returns and lower risk (as measured by standard deviation) than the S&P 500 alone. This seems so extraordinary to some investors that they just don't believe our numbers - which, by the way, are audited per AIMR Standards. Since Global has a good deal of US exposure, it is considered a client's core account, while international is usually used by clients who are asset allocating among many managers and/or styles.

Q: Would you tell us a little about your International Small Capitalization Equity Portfolio?

A: O'Neil: Our newest product is International Small Capitalization, or ISC for short. It is invested into foreign, well-managed companies with market caps of $1 billion or less. Although that may seem small in the context of the American economy, and it is, it may be a relatively much larger number in other countries. Remember that America accounts for about 1/3 of all the market cap in the world. The remaining 2/3 is made up of all other countries - say 150-200 countries, including such giants as Japan, Germany, and the UK. However, because of the difficulty of trading such stocks, and since most of them are not available here as ADR's, we're restricting minimum investment to $250,000, preferably for investors with net assets of $1.5 million or so. ISC is a riskier portfolio, and we want prospective investors to know that. However, the rewards are potentially much greater. It will most likely be used by investors who are asset allocating into many different styles with foreign portfolios.

Q: What kind of investor would be interested in your Global Balanced or Domestic portfolios?

A: O'Neil: Cautious investors who are not yet fully committed to international investments. Global Balanced is roughly 1/3 each American stocks, foreign stocks, and American bonds (usually treasuries). It normally provides higher yields (interest plus dividends) and lower volatilities. Domestic Equity, is of course, all US stocks. These two products might appeal to more mature investors, especially if they have international exposure elsewhere. Brandes seems to have a very low volatility for a manager.

Q: How are you able to achieve this?

A: O'Neil: The low volatility, or low standard deviation, is a by-product of our very conservative, value-based approach to investing. For one thing, we're very careful about selecting stocks for purchase. We shy away from sectors that are notorious for high volatility, like high technology. Next, we hold stocks for long periods, up to 3-5 years. Also, we have low turnover in our portfolios, usually 20% to 30% per year. All these factors, and more, add up to low volatility. We don't specifically try to produce low volatility - it's just a pleasant side effect of the tried-and-true, Graham-Dodd-Brandes method. Brandes goes back to 1977.

Q: Would you give us a short history of the firm?

A: O'Neil: Actually, Brandes the firm dates from 1974, or 21 years ago. Ben Graham moved to the west coast from New York in the late 60's, and Charles Brandes met him here. At the time, Charles was a stockbroker. He was so taken with Graham's philosophy that he adopted it. Shortly thereafter, he started his own firm. For 16 years, he had only one product - Global Equity - and his firm grew to 7 employees and $130 million in assets managed. During the past 5 years, we've grown to 5 products, 92 employees, and $4 billion in assets. The firm is owned almost entirely by employees. It's managed by four Managing Directors: Charles Brandes, Glenn Carlson, Jeffrey Busby, and me.

Q: How many portfolio managers do you have and what are their backgrounds?

A: O'Neil: We have 19 portfolio managers out of 29 total professionals, all of whom belong to the Investment Committee. Average portfolio manager experience in the industry is 8 years, with a maximum of 26 years. Our professional staff includes 11 CFA's (Chartered Financial Analysts). In addition, we currently have 9 other candidates working on their CFA designations. Of our 29 professionals, 28 have college degrees, including 12 MBA's and one JD. We even have an MIT engineer on our staff! Our employees hail from several countries and speak about a dozen languages besides English.

Q: What do you see for Brandes' future as an investment manager?

A: O'Neil: An interesting question. The approach we use is not self-limiting as to size of firm or size of individual account. It works at all levels, from the smallest to the biggest. We have written plans in place as to how much staff, equipment, and space we'll need at $5, $7.5, and $10 billion in assets. How long it'll take to reach each milestone is, of course, open to discussion. It's even conceivable we might reach $20 or $30 billion someday. At least, we're doing everything we can to ensure quality of investment management as we continue to grow and add clients.

Q: How do you handle so many accounts - are you fully computerized?

A: O'Neil: Boy, are we ever. We have a computer terminal on every desk, tied into our main computer. That's 80-some-odd terminals tied into a very sophisticated multiprocessing computer with several gigabytes of memory. Plus, we have a dozen or so PC's for special projects, word processing, graphics design/production, screening for stock candidates on CD-ROM's, and so forth. In addition, we have database terminals like Bloomberg and Reuters, plus trading terminals like Autex and Instinet. Our offices are almost a computer wonk's heaven.

Q: How are investment decisions made - by a committee or by each portfolio manager?

A: O'Neil: By the investment Committee, which meets weekly and consists of all 29 professionals, including 19 portfolio managers. The Committee is presided over by 3 of our 4 Managing Directors, all of them CFA's: Charles Brandes, Glenn Carlson, and Jeffrey Busby. Every week, we get update reports from our regional and industry analysts, who double as portfolio managers. Then, if a member wants to present an idea to buy or sell, he/she must hand out a written research report on the company in question. Ultimate decisions are made by the 3 presiding members, then carried out by the portfolio managers. Normally, when we first buy a stock, we'll take a small position, say 2%-3% in an account; later we'll add up to our maximum of 5%. Prior to buying, we set the sell point and buy limit for each stock, so there's no guesswork later. However, sell points can be adjusted as the value of the business changes.

Q: Other investment managers who've grown rapidly have also fallen rapidly. Are you taking any measures to prevent this?

A: O'Neil: Yes, emphatically. We're doing everything we can think of, and we would appreciate any other suggestions that your readers might have. We're acutely aware of the dangers involved with growing too rapidly. For example, such growth makes investors, brokers, and, especially, consultants very nervous. And rightly so - they don't want to hire a manager who might not have the infrastructure in place to handle the growth. So we've carefully considered plans for the staff, equipment, and space needed at future milestones of growth - $5 billion, $7.5 billion, $10 billion in assets. At any given point in time, we try to be a little overstaffed, especially professionally, so as to have staff members up and running when needed. Minor glitches in computer programming or accounting are handled immediately, so they don't become major glitches. We bring new people on board one at a time, rather than en masse. We've been able to maintain an esprit de corps, and all employees are familiar with our Mission Statement. We are fully committed to the clients and brokers we serve.

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