Thomas Mengel, manager of Waddell & Reed International Growth Fund, has been in all the right places lately. He loaded up on Japanese and European telecom and technology stocks, enabling the fund to return 88.7% in 1999, nearly double the 45.4% scored by the average international equity fund. Its 48.2% average annual total return over the past three years beat its peers by better than 2 to 1. Mengel, 42, hasn't had a money-losing year since he took over the fund in 1996. A native of Germany, he holds a degree in business, finance, and economics from the University of Berlin and was president of Sal. Oppenheim Jr. Securities, an equity research boutique in New York. He spoke recently with Standard & Poor's FundAdvisor Associate Editor Jane Sandiford. A longer version of the interview is at www.personalwealth.com.
Q: What's your investment process?
A: We look for companies with sustainable growth of 10% a year or more. We do some financial screening so we don't overpay. We don't want the p-e ratio to be much above the growth rate. For New Economy companies, we use other measures like the ratio of enterprise value, or market capitalization and net debt, to sales.
Q: What are your biggest country allocations?
A: The biggest allocation is Japan, at 17%; France, 16%; Germany, 13%; Britain, 12%; Sweden, 8%; and Canada, almost 7%. We cut back this year in Japan from 25% because the market has gone up so much.
Q: How do you feel about the two-tier market for stocks, with small bands of big tech winners and hordes of losers?
A: This is happening all over the world, but we don't believe it's going to continue forever. We are starting to broaden our portfolio a little bit. We are still looking for companies that are growing quite well but don't have this sexy Internet attachment. For example, we recently bought Singulus, a German company that's a leader in production equipment for CD-ROMs and DVDs.
Q: Tell us about a favorite holding.
A: We have a big position in Heyde, a German [information technology] service provider. They specialize in banks and financial companies, mostly in Germany. Last year they bought a company that provides Internet applications for online brokerages, and they leveraged that product to their existing client base. They now have five or six banks under contract. They just announced a partnership with SAP, which will enable the bank to offer more functionality to the online brokerage platform, and a partnership with Compaq. [As of late February], the stock has tripled.
Q: So you're open to Internet investing?
A: To a certain extent. We have invested in some Web agencies [consulting firms] because we believe that all the companies that want to do e-commerce need someone to help them develop a Web strategy. We have Framfab [in Sweden] and Fi System [France]. We own Cross Systems, a French Web agency that's moving heavily into wireless.
Q: You own Mannesmann, I believe.
A: We have a very big position. We think the combination of Vodafone and Mannesmann will be a powerful holding. This new company will be a benchmark...and will lead others to consolidate their wireless assets.
Q: What are your biggest sectors?
A: In general, telecom and technology. Telecom is around 24%, technology a little over 20%, and media about 7%.