For Robert H. Lyon, size doesn't matter. His ICAP Euro Select Equity Fund usually holds only about 20 stocks at a time. But Lyon, a strict value investor, makes them count: The $21.2 million fund has returned 6.9% a year since its inception at the end of 1997 and beaten its benchmark index each year since 1998. At the Chicago offices of ICAP PLC, BusinessWeek's Brian Hindo got Lyon's take on investing in Europe.
Q: What are the advantages of buying stocks in Europe vs. the U.S.?
A: First, the price-earnings ratio on European stocks is at about a 30% to 40% discount from U.S. stocks--as big as it has been in the last 30 years. Second, the euro at 87 cents to the dollar is a competitive plus. You can win by having companies able to export more. Investors will make more money in Europe in the next 12 months than they will in the S&P 500.
Q: Do you target specific countries when you compile your European portfolio?
A: We're the opposite of the traditional global investor. Historically, people would try to pick the best currency block or the best country. Generally, we're looking for a great global competitor. We think Nestl? is the best food company in the world and that Diageo is by far the best drinks company. They could be in France, or they could be in Botswana. We would like to own their stock.
Q: What's the fund's biggest holding?
A: It's a Belgian company called Groupe Bruxelles Lambert, which is really a holding company and has big investments in two French companies, Total Fina Elf and Suez Lyonnaise des Eaux. It also holds a 25% interest in Bertelsmann, the private German media conglomerate. Along with the 25% interest, it got the right to force Bertelsmann to have a public offering no later than 2005. Our view is that Bertelsmann is worth somewhere between $25 billion and $35 billion. When Bertelsmann does go public, probably sometime in the next two years, we would expect GBL stock to increase by at least 50%, if not more.
Q: What sectors are you avoiding?
A: We've reduced our investment in financials, particularly on the insurance side. A lot of the European insurers are dependent upon capital gains that they flow through their income statements. In a weak stock market environment, their earnings have been disappointing. And bank profits may be hurt by continued credit problems.
Q: Are you optimistic about a pickup in Europe's economy?
A: Not really. Most strategists favor more cyclically sensitive companies, anticipating that economic improvement in the U.S. will filter through Europe and lead to a rebound. Our view is that recovery in Europe will not be that strong and that a lot of those stocks have already moved up. We're favoring more defensive sectors like consumer staples--stocks like Nestl? and Diageo.
Q: How do you break down Europe on a country-by-country basis?
A: Germany and France are really falling short. There has been a lot of backtracking in terms of their willingness to lower taxes, enhance transparency, and really encourage shareholder democracy. Britain and Scandinavia are well ahead of France and Germany. The Italians are making some more capitalist-type noise, which is also engendering a lot of labor unrest. Spain has been a pretty steady grower all along. Britain is expected to slow down but isn't really slowing that much. It would be nice if Germany got rolling, but I don't see that happening. There's no particular driver right now.
Q: What about the euro?
A: The euro is probably a cheap currency. Academic models [put its value at] anywhere from 95 cents to $1.10. On the other hand, right now the euro is still a synthetic currency. There's no United States of Europe. And they don't have 14 aircraft-carrier battle groups. [The U.S. is] one country, and it has one big military presence. It is the sole superpower. That's worth 10 cents or 15 cents. Hopefully, the euro won't go any lower. It doesn't seem to have benefited [European countries'] trade situation. They have a current-account surplus with the U.S., but the euro doesn't seem to be a huge competitive weapon for them.
Corrections and Clarifications
In ``A bargain hunter scans Europe'' (BusinessWeek Investor, April 29), Institutional Capital Corp. was incorrectly identified as ICAP PLC.