For better performance, look to the international mutual funds. They should continue to outperform U.S. equity funds for the next couple of years because of the dollar's weakness and the lower valuations in markets abroad. That's the appraisal of Rajiv Jain, senior vice-president and managing director of Vontobel Asset Management and portfolio manager of the Vontobel International Equity Fund (JVEIX ), who sums up his investment discipline this way: "We focus on high-quality, predictable businesses that have delivered for years, and we believe will be able to grow for years, and are selling at a significant discount to their intrinsic value."
About a third of Jain's fund is in consumer staples, he reports. On a 12-month basis, the fund Jain runs is up about 26%, vs. 19% for the S&P 500. Over the last 10 years, U.S. funds generally did better than international names, largely because of problems in Japan, but Jain now expects the reverse to be true for a while because of the dollar and valuations.
These were a few of the points made by Jain in an investing chat presented May 27 by BusinessWeek Online on America Online, in response to questions from the audience and from Jack Dierdorff and Karyn McCormack of BW Online. Following are edited excerpts from this chat. A complete transcript is available from BusinessWeek Online on AOL, keyword: BW Talk.
Q: Looking at the broad markets for a moment, what do you think of the skittish behavior we've been seeing?
A:In the short term, there obviously are concerns about the geopolitical situation, oil prices, rising interest rates, and reasonably rich valuations. So I think, due to a combination of all of these, we probably will remain in a choppy environment for some time. Most importantly, from our perspective, valuations are not cheap, and if interest rates go up, it makes stocks look even more expensive.
Q: Do you still follow a value strategy? And have there been changes since the Vontobel International Equity Fund came under the wing of Janus?
A:It's not really a strategy -- it's a discipline. Nothing has changed, and nothing will change. I started managing this fund three years ago, and we focus on high-quality, predictable businesses that have delivered for years, and we believe will be able to grow for years, and are selling at a significant discount to their intrinsic value. Last year we had almost a third of the portfolio in consumer staples, which was true the year before and is true this year.
Q: Give us your favorite stocks and why at this juncture.
A:Well, some of the names, if you look at some of our largest positions, have not really changed much over the last few years, like Diageo (DEO ). That's a stock that's still trading around 13 times earnings, with a dividend yield of 3.4% This is a company that has been around in different shapes or forms for a very long period. As you know, Red Label/Black Label Scotch, which was launched over 100 years ago, is growing with no change in product.
DEO dominates the U.S. hard-liquor market, with an over 25% market share. They have pretty good pricing power with that, and this is a business that is not vulnerable to market cyclicality. There's a lot of growth coming in from emerging markets, so this company should be able to grow in the 7% to 8% range for years to come. They're aggressively buying back their stock. If a company of this stature is only selling at 13 times earnings, it's extremely cheap.
Another name we own is Nestle (NSRGY ). It's a global franchise in foods and beverages, with their water being a fast-growing portion of their business -- again, selling at 13 to 14 times earnings and will grow for years. These companies were both selling at 20 times plus a few years ago, so there has been a massive multiple contraction over the last four to five years.
We also like Tesco (TESOF ), the grocery retailer. Same thing, it's a company that I believe should be comparable to Wal-Mart (WMT ) in the long run -- in fact, it's doing extremely successfully against Wal-Mart in Britain. It's one of the largest grocery companies in many Asian countries, along with Eastern Europe, so it's hugely successful outside Britain as well. This clearly seems to be an underappreciated name at 13 to 14 times earnings, growing at a decent pace with a good dividend yield to boot.
Q: What do you think of Barclays (BCS )? Are financials still the biggest group in the fund?
A:Yeah, financials still remain one of the largest groups in the fund. I don't have a very strong opinion on Barclays. We don't own it. But we do have positions in Banco Popular in Spain (BPESF ), Northern Rock (NHRKF ), and several others. The commonality in the names we own is that they're clean, high-quality, fast-growing banks. Royal Bank of Scotland (RBSPF ), another one we own, has been making some acquisitions but has still been growing fast on an organic basis. And these are all around 10 times earnings or less.
Q: What is your advice on investment in India?
A:We have around 3.5% of the fund in India. One has to keep things in perspective, because recently there has been a lot of volatility caused by the election results. But to give you a slightly longer-term perspective, in the last 15 years there have been two assassinations of Prime Ministers, I think around seven or eight changes in government, economic sanctions coming from the nuclear testing, an extremely close brush with all-out war with Pakistan -- twice. So there have been a lot of things that have gone wrong, but the economic growth has been around 6% during the same period.
Long term, India offers even better opportunities than China. The valuations are pretty attractive -- the market is selling at around 11 to 12 times earnings. For example, we own ITC (IIITE ), the largest cigarette company. It has more than a 75% market share and cigarette consumption in India is a tenth of what it is in China, because people smoke a lot of hand-rolled tobacco. But as they go above the poverty line, they upgrade and buy cigarettes. So long term, this company could stand to grow in double digits for years. There are a lot of companies like that that you can come across.
Q: Please comment on ABN Amro (ABN ).
A:ABN Amro is one of our largest positions. It's a fairly misunderstood bank. They've done a decent job in turning around their operations in the Netherlands. It's also one of the largest banks in the Midwest. It's selling around eight times our earnings expectations for them this year, with a 5.5% dividend yield. So for a bank that has a record over the last 13 or 14 years that demonstrates it's well run, has a decent franchise in the Midwest and Brazil, we believe it should continue to grow at mid-single digits -- but it's selling at extremely low prices.
Q: How has your international fund been performing relative to U.S. equity funds?
A:If you look at year to date, we're up 1.3%, and on a 12-month basis, we're up approximately 26%. The S&P's up around 19% over the same period, and I think on a three-year basis we should be outperforming the S&P by around 250 to 300 basis points. The international funds should continue to outperform the U.S. funds on average. The reasons are (a) the dollar should remain weak, (b) certain international markets are much cheaper than U.S. markets.
Q: On Japan, despite its problems do you like any stocks there now?
A:Well, Japan we've historically been fairly light on. We do like some names. For example, we do like Tokyo Gas (TKGSF ). They're one of the largest gas utilities. Gas consumption is pretty much growing across the board. Their gas sales grew at mid-single digits even during recession in Japan. The stock is trading around 13 to 14 times earnings with a decent dividend yield. They're also buying back their stock, and the bulk of the capital expenditure is behind them, so they should be generating a decent amount of free cash flow.
Q: What portion of a long-term portfolio would you recommend for a U.S. investor in international?
A:It really depends on a number of things. The risk profile, time horizon, and stuff like that. But I think it should be at least 10% to 15%, on average. But it's hard to say a good number for all people.
Edited by Jack Dierdorff