San Diego money manager Charles Brandes suffers with sagging newspapers

Rancho Santa Fe’s Lady Catarina Pietra Toumei has been charged with peddling phony investments.
  • Rancho Santa Fe’s Lady Catarina Pietra Toumei has been charged with peddling phony investments.

Daily newspapers still report titillating items regularly. Early in February, the shapely Lady Catarina Pietra Toumei was charged in Manhattan with claiming she was a representative of the storied Guggenheim family as she tried to peddle fake diamond, gold, and oil investments. She is a social butterfly residing in Rancho Santa Fe (where else?). Trouble is, prurient readers could get this news for free online many hours before the newspaper reported the story the next morning.

So, it was not surprising that only a few days after the lady (who may or may not be a countess) dominated front pages that the big Sacramento-based newspaper chain McClatchy reported a 10 percent plunge in its January advertising revenue, compared with a year earlier. McClatchy’s earnings were about cut in half during the period. The stock plunged 12.2 percent that day.

Admittedly, the adventures of the comely Lady Catarina Pietra Toumei are more captivating than the plunging profits of McClatchy Company. But the ad sales drop of the newspaper company does interest us old fogies who concentrate on (1) money and (2) the media. Bottom line: it’s clear that investors, and perhaps the daily newspaper industry itself, are convinced that advertisers will continue to migrate to digital media, and even though dailies are stepping up their own efforts to make money online, it’s a losing battle. Ink and paper will continue in sick bay.

Daily newspapers are slashing costs, but that won’t be enough. There are rumors that the San Diego Union-Tribune, Los Angeles Times, Orange County Register, and smaller papers owned by MediaNews Group could consolidate under common ownership. Hedge funds that have scooped up debt of overleveraged Southern California papers “are intent on driving consolidation,” says columnist James Rainey of the Los Angeles Times. The individual newspapers would retain their identities and news staffs but would combine efforts in advertising sales, distribution, printing, and human resources, says Rainey.

Such consolidation would no doubt lead to even more personnel head chopping. But would more pogroms work? Wall Street analysts don’t think so. They think the future of the daily newspaper is grim. “We are skeptical of the New York Times’ ability to keep reducing costs, and are concerned that the company will run out of fat to trim and have to cut into muscle, hurting the quality of its product,” says Joscelyn MacKay of Morningstar Research. “The growing number of free online information sources continues to weigh on New York Times’ core business,” which is newspapers, representing 84 percent of sales.

Newspapers are 78 percent of the revenue of Gannett, the largest publishing chain. Free online competition hurts. “Circulation volumes are falling, and advertisers are shying away from newspapers,” says MacKay.

Standard & Poor’s says McClatchy suffers from “migration of advertisers to the Internet.” Ditto for the Washington Post, which is also burdened by its ownership of Kaplan, Inc., a for-profit college operation that could lose some of its federal funding because of past and present misbehavior.

Morningstar quit doing research on E.W. Scripps stock. In 2008, E.W. Scripps created a new entity for its fast-growing cable networks and interactive media. Now the original media chain has only laggardly newspapers and TV stations; the websites associated with the company account for a small percentage of revenue.

Today, the question is whether the iPad and other “tablet revolution” products will rescue the daily newspapers. Investors doubt it.

The stock market seems to agree with analysts’ skeptical views. Newspaper stocks are far off their all-time highs, although they are now up from their very depressed 2008–2009 lows. Example: Gannett stock sold for $91.38 in 2004. In the depths of the bear market in early 2009, it plunged to $1.85. On Friday, it closed at $16.98. McClatchy sold for $76.05 in 2005 and sank below 50 cents in 2009, as Morningstar warned it was worth nothing. On Friday, it closed at $4.24.

Investor Charles Brandes, with third wife Tanya, has seen money under his management drop dramatically.

Investor Charles Brandes, with third wife Tanya, has seen money under his management drop dramatically.

This brings us to Charles Brandes, San Diego money manager. His firm, Brandes Investment Partners, bought into McClatchy at $44.50, becoming the media company’s largest institutional shareholder, with 14.63 percent of the stock. Then the Brandes firm committed one of Wall Street’s unforgivable sins: selling near the bottom — in McClatchy’s case, 70 cents. Similarly, the firm bought into Gannett between $36.50 and $55.50, becoming the largest shareholder with 11.25 percent of the stock. It dumped the stock in late 2009 for an average price of $7.21 — less than half the price it closed at on Friday, $16.98. (Copley Newspapers dumped the Union-Tribune near the bottom of the market too.)

Brandes also got into a lot of other stinkers, such as Countrywide Financial, the scandal-plagued mortgage pusher that Bank of America tried vainly to purify; Washington Mutual, a similar organization seized by the government in 2008; Royal Bank of Scotland, which fell under the watch and ward of the British government; and Freddie Mac (Federal Home Loan Mortgage Corporation), which went under U.S. conservatorship.

Charles Brandes’s investment strategy is to buy undervalued assets and wait until the stock price gets more realistic. A couple of decades ago, newspapers’ profit margins were around three times those of the average company. A former manager with the firm thinks that Charles Brandes kept expecting newspapers’ profits and stock prices to return to the good old days. He was not grasping “the reality of what was going on in print media — falling subscriptions, falling revenues. There was a paradigm shift” that more alert analysts perceived.

In 2005, Brandes Investment Partners had $101.9 billion under management. That’s down to $47.8 billion. But Charles Brandes built one of San Diego County’s most expensive homes. It’s 54,000 square feet on 30 Rancho Santa Fe acres and is worth at least $35 million. He lives there with his third wife, the lovely Tanya, and their enormous collection of cars and other chattels of the rich and chic. Meanwhile, he is having a knockdown, widely publicized divorce battle with his second wife.

Charles and Tanya are quintessential Beautiful People of the San Diego party set — pictured in the Union-Tribune in mid-2008 with David Copley at Cannes, for example.

On October 23, 2009, the Scripps Institution of Oceanography and David Copley put on a soiree to honor His Serene Highness Prince Albert II of Monaco. Charles and Tanya were there to socialize with the prince — and with Lady Catarina Pietra Toumei, another invitee.

I didn’t see it covered in the daily newspapers.

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Don, great article! Thanks for keeping tabs on the newspaper industry and throwing in the tabloid details to keep it interesting. I really miss the newspaper business. Makes me sad every time I think about it all crashing and burning.

The interesting question is how many years -- or generations -- the ink and paper product will last. Another question is why newspaper chains did not see the electronic revolution coming. And why did not chains see the fact that younger people were not reading? That was obvious in the mid-1980s. Many studies showed it. Some on Wall Street knew it and were bearish on newspaper chains. I will never forget an experience I had at Copley in the late 1980s or early 1990s. I wrote a column on the media. I mentioned that newspapers had a problem: readership surveys were showing that young people were not reading. I didn't mention Copley. The general manager of the U-T wrote a blistering letter to Helen and David Copley, screaming that I was hurting the business. He claimed that competing radio and TV stations were using my column to sell ads. He went on to say that local business executives thought I was anti-business, and I was an enemy of the company and the business community. If he had had any brains (and he didn't, unfortunately), he would have asked me for copies of those studies and incorporated the results in his analyses of what to do in the future. But he was incapable of making an analysis. Best, Don Bauder

Another question is why newspaper chains did not see the electronic revolution coming

I doubt anyone could have seen the scope of the Internet's reach before 1996, 1997. It has liuterally changed the world with the amount of information you can gather in mere seconds, as well as the "real time" gathering of information.

I can't vouch for those dates 1996 and 1997. But I can say that as electronic technology advanced, media decision makers should have done a better job pondering future developments. I know that reporters and columnists -- not at the top of the totem pole -- discussed the possibility of newspapers showing up on devices similar to iPads, and having newspapers printed at home electronically so that readers got the latest news, long before 1996 and 1997. Best, Don Bauder

Too bad that I did not go on some sort of public record around 1980, when I predicted that news in newspaper format would eventually be delivered on what I called then a sort of computer terminal. That way I could claim that I knew it was coming. But at that time, I had no notion of how soon it would be reality.

Strangely, over the past several decades, as literacy levels in the US were described as rising, newspaper readership and influence declined. Was it the advent of TV and the ever-uninformative TV news? That was probably the major factor. TV's proliferation in the 50's has been credited or blamed for many things. The membership in lodges and fraternal organizations in absolute numbers peaked in 1954, just about the time that most households got a TV set. Why go to the lodge meeting when you could sit at home and watch William Bendix in "The Life of Riley?"

To slightly change the subject, if Brandes made so many bad calls in his value investing choices, how is it that he's so rich, as in supposedly the richest in SD county? Is his fortune being overestimated, or is something else going on there?

I think TV is one explanation for newspapers' woes. Radio, too. But ponder: back in 1980, what kind of news did you get late at night over TV or on the radio? Zilch, unless there was a special event, such as the first Iraq war. I can remember that TV would have news of that war and the U-T the next morning would not have it -- in fact, would have news that had broken 2 hours before the major news event that TV carried. But outside of these big events, late night TV was just the same old junk. Ditto radio. Now there are cable stations, etc. with up-to-the-minute news, at least until about midnight. The morning paper is still woefully out of date by the time it arrives on your doorstep. But I agree with you: top management of newspapers should have pondered how electronics might change the news business and done something defensively. As to Brandes: he still has $47.8 billion under management. It's down from more than $100 billion but it's a good pile of change. Best, Don Bauder

Too bad that I did not go on some sort of public record around 1980, when I predicted that news in newspaper format would eventually be delivered on what I called then a sort of computer terminal.

Do you mean like this KRON news report, made in 1981!!!!

It is truly amazing to look back on this vodeo and see what has happened;

. http://www.youtube.com/watch?v=5WCTn4... .

I believe it’s widely acknowledged that Charles Brandes has, for several years now, ceased having any influence on, or significance for, the U.S. investment industry. The same can be said with respect to Charles in relation to his own firm (if his own court pleadings in his divorce case can be believed). Indeed, one of the major criticisms raised about Charles by leaders in the global consulting and brokerage communities spearheading the mass exodus of Brandes’ clients, is his unwillingness to make necessary changes or adjustments regarding the dozen or so members of his firm’s Investment Committee that is responsible for the firm’s sustained underperformance and often highly questionable investment decisions. I believe that Brandes’ 1, 3, 5, and now 7 year performance numbers are all under their relevant benchmarks. Faced with pressure and demands by consultants, brokers and clients to make changes to the quality and composition of this Investment Committee, Charles & Co has steadfastly refused – resulting apparently in the loss of approximately $60 bn in assets under management over 5 years according to this article. This misplaced loyalty probably costs him about $240 mm in lost fees per year. This is to say nothing of what this faith in the competence of his Investment Committee has cost his clients. No serious businessman ignores the need for accountability and allows such an avoidable collapse to befall himself, his firm and his clients. No serious businessman does this while smilingly vacantly from the society pages.

Had Charles shown such loyalty to his second wife Linda, he’d of course be in a better position to keep 100% of the annually dwindling fees afforded him by his investment team. If he’d shown such loyalty to his clients, he may not be facing such steep reversals. One wonders at what level of AUM his third wife Tanya joins his clients in the quest for “greener” pastures. In any event, Charles’ refusal to effectively deal with the problems of his Investment Committee makes him the comic lead in his own personal production of “King Lear” with his Investment Committee playing, of course, both Goneril and Regan and his clients playing the long-suffering Fool. "O nuncle, court holy water in a dry house is better than this rain water out o'door."

I have always wondered if Brandes's commitment to Graham/Dodd has been almost a religion for him; he just won't give it up. This is not to denigrate Graham/Dodd. I am a value investor myself, but if I managed other people's money I wouldn't be in business long, because I am not in it for the short haul. I buy blue chips with good yields (almost always 4% or more) and well-covered dividends. (Obviously I am loaded with utilities.) I don't mind losing on the short- and medium-term because I like that income, especially when it's more than bonds provide. Brandes got into foreign stocks at the right time. His fund grew exponentially -- almost certainly too fast. Some money managers just have too much under management; their own size hurts them. This could have happened to Brandes. I actually started writing about Brandes in 1973 when I arrived at the Union. I picked him up in 2007 for the Reader. As his investment returns plunged and the portfolio crumbled, I have written a number of Reader items on him since. One last thing: I do not think it is wise for a money manager to own the most expensive house in the county and consume conspicuously, as Brandes does, showing up at Beautiful People parties. Best, Don Bauder

Whack is a verb that describes what happens to portfolios -- my own included. Best, Don Bauder

Re: By dbauder 8:45 a.m., Feb 26, 2011 (Can't trust the numbers to continue to refer to the same post, so this longer form will have to do . . .)

On newspapers. I LIKE newspapers, but then I'm not young. But what I do like to do is sit in the cafe, surrounded by laptop zombies, and read the paper if the're no disconnected young people to talk to (the old ones just rant [though there are exceptions], and the middle-aged ones [exceptions, of course] are too busy meat-marketing). Then I like to take the paper home (or make notes and leave it for others), and go to the same piece on the web site, make a copy, then file it. I even print out some of them.

The newspapers are committing suicide (except the Reader?). They are vulcanized, sclerotic, even--at the top. At the bottom, the sacrificial lambs, the good writers and editors with a comprehensive grasp of what's going on. There will always be a market for talent, so you and Ann should be ok, but there's a lot of talent out there, and they're CONNECTED, plugged in, wired, even though they don't have a fraction of the connections you do. Even I used to get a free-lance piece published every now and then before the Great Flood of Submissions when the pimply intern could just scoop the latest thing from the top of the pile going all the way up to the transom. And they would print it. Or worse yet, forget the free-lancers and stick with BIG NAMES. Salesmanship. News? Turn on CNN and Google stuff. Crank it out and keep the resume current.

Newspapers are cutting themselves to pieces because they were not willing to transform themselves into the potential they had suppressed for years--a superior means (including the Internet, integrated with it) of being the Fourth Estate to whom almost everyone would turn, and a new way of putting buyers and sellers together. They are DRIVING their readers to the Internet, it isn't sucking them away.

That's an interesting thought. Perhaps newspapers are driving readers to the Internet. However, I am an avid reader of the New York Times. One doesn't feel getting stale news, because there is always an interesting angle. And there are always facts that other media have not come up with. That's true both of the print and online editions. Best, Don Bauder

C-Span recently had some talking heads on about the internal politics at NYT. You can probably find it on their website.

It's not that they don't have talent, it's that they don't know how to use it and to understand what the reader wants in terms of comprehensive, quality news service and watchdoggery. In this respect, the NYT was smart in hooking up with Wikileaks, but it remains to be seen how smart in how they did it.

Newspapers still are in a position to offer the kind of quality you and I demand (damn CNN--get it RIGHT), but in a more organized way. And yes, format has a lot to do with it.

Bringing buyers and sellers together is, for the moment, a "secret," but it is so obvious I don't know how they could miss it.

The problem is definitely generational. That's why some are holding out hope for the iPad. Best, Don Bauder

To the person who is using Ann Humphreville's name (7)- please stop it. She was a proud Brandes employee who died from cancer 2 years ago. If you have an opinion you would like to share, be courageous and express it as yourself.

I didn't know about Ann. Best, Don Bauder

To the person who is using Ann Humphreville's name (7)- please stop it. She was a proud Brandes employee who died from cancer 2 years ago.

That is very low, using her name like that.

Moderators should delete that obvious gimmick account.

Our moderators would have had no way to know that someone by that name had worked for the company and died. Best, Don Bauder

Dang. Those rich old guys sure like their trophy wives!

That's what the market system is all about. She has what he wants (beauty) and he has what she wants (money).

Dang. Those rich old guys sure like their trophy wives!

============ When I make my first million I am buying one of my own!

It takes more than a million to get a real trophy. A million doesn't go far these days. Best, Don Bauder

Alas, the conversation is drifting, but then, the eviscerated, glass-eyed nature of the trophy-wife (or husband) renders them unfit for life beyond the fantasy. It is a real mind-blower that this digression really does get at the heart of the matter.

The concept of the trophy wife or trophy husband is really degrading. Best, Don Bauder

Yes-I said I was going to buy one as a purely sarcastic comment.

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