One Fund's Strange Brew of Finnish and Colombian Stocks
Come September, James Moffett, manager of the $9.7 billion Scout International Fund (UMBWX), will be one of only 20 foreign-stock-fund managers to have run the same fund for 20 years. Since its 1993 inception, his fund has delivered an 8.7 percent average annualized return, almost double that of its MSCI EAFE foreign-stock benchmark. It's also outperformed peers over the past 15 years with an annualized return of 7 percent versus 5.4 percent for its Morningstar category of foreign large growth funds. Scout International can lag in strong cyclical bull markets but tends to outperform in downturns because of its focus on high-quality companies. Lewis Braham spoke with Moffett, 72, about where the manager sees international opportunities today.
You used to invest almost exclusively in American Depositary Receipts (ADRs) — blue-chip foreign stocks that trade on U.S. exchanges. How has your strategy evolved?
We’ve grown beyond ADRs but still maintain a quality focus. We buy companies with strong returns on equity and conservative balance sheets and hold them for the long term. Our portfolio turnover is about 20 percent a year, which implies a five-year time horizon. There are a few stocks in there like Nestle (NESN) that we’ve owned literally since the day we started.
Why did you move beyond ADRs?
When we started the fund, buying ADRs gave us some confidence in a company’s accounting. In order to be listed on U.S. stock exchanges, companies have to conform to U.S. Generally Accepted Accounting Principles, or GAAP. International accounting standards weren’t as good as ours back then. International accounting standards have risen over that period, and the gap between our accounting standards and the rest of the world has narrowed substantially.
What is your economic outlook now, and how does it affect your strategy?
We think the U.S. is the best economy in the world and the driver right now. So we are looking for industries in countries that can participate in U.S. growth. That is one of the reasons we like auto stocks, because auto demand is growing here, so we’re buying companies that sell into that market. We’ve added to positions in Toyota (7203) and Fuji Heavy Industries (7270), which makes Subarus. At the same time, we’ve cut back in the same auto sector in Europe. Europe is going nowhere right now. We view it as a couple years behind us.
Yet more than half your portfolio is in Europe.
The MSCI EAFE benchmark of international stocks runs at about 65 percent in Europe, and we are 57 percent or 58 percent, so we are underweight the region. There are also some big differences in our country weightings and the index’s. A tiny country like Finland is overweighted in our portfolio, and our largest holding is Finnish insurer Sampo (SAMAS). Otherwise, we often find good companies in European countries with bad economies.
Can you talk to me about Sampo?
The company is reasonably priced, with a price-earnings ratio of 13. Their earnings keep going up, and they run a sound, quality operation. From a broader perspective, we favor insurers over banks now. We also own Allianz (ALV) and Munich Re (MUV2). Insurance is a more stable business than banking, as it isn’t subject to bank runs. Moreover, insurers like Allianz, which owns Pimco Funds, sell annuities to retirees. In Europe there is a shortfall of retirement savings in government-based pensions. So there is an increasing emphasis on selling investment products to individuals and companies for retirement plans. We see that as an attractive growth market.
Your most recent shareholder letter showed a growing enthusiasm for Japan after many years of disappointment.
We have some hope. We are always worried about the Charlie Brown syndrome, where the ball is going to be pulled out from us again. The old cliche on Wall Street is 'This time it’s different.' That’s the question if Prime Minister Shinzo Abe is going to be able to make a difference. He’s talked about a three-arrow strategy, the third arrow being structural change. If he can deliver on that, it could be a different Japan story.
What companies are you investing in to play a recovering Japan?
We like Fanuc (6954). It makes robots and numerically controlled machine tools for factories. Until Japan’s capital spending picks up, it is not going to be a very hot stock. At some point, when Japan retools and the auto industry grows globally, it's going to be a player. We own Komatsu (6301), which makes construction and mining equipment, for the same reason.
What is your view of economic prospects for emerging markets?
China is going to grow at 7 percent or 5 percent, not in the double-digits anymore. Particularly in commodities prices are on the march so you do not want to have demand fall off. China overexpanded and that is one reason we are cautious. Everybody thought it was going to buy every last barrel or ton of raw materials. Brazil is a country we cut back on because of its raw materials exposure. Interestingly, Australia and Canada are exposed in the same way.
You have an unusual emerging-markets play in Colombia.
It boils down to the phrase “when did you last hear of the FARC?” For decades there was a civil war in Colombia that is slowly winding down. The [militant Marxist group] FARC is negotiating with the government and the question is can they make a transition to being a political party as opposed to being a bunch of rebels in the jungle. Even as rebels in the jungle their power is a lot less. We consider Colombia an improving situation.
How have you played that situation?
We dumped our Petrobras (Petroleo Brasileiro SA; PETR3) in Brazil and put our money in Ecopetrol (ECOPETL) in Colombia. Ecopetrol’s oil is on the land, where you can get to it. By contrast, Petrobras is sinking hundreds of millions of dollars into drilling in the middle of the Atlantic Ocean. Petrobras’s costs are high, while Ecopetrol’s costs and risks are a lot better.
What do you consider the best bargain in your portfolio?
Barclays PLC (BARC) is probably the best one. Its regulators in the U.K. are making the company raise more capital as a cushion against future declines. That will cause some dilution to shareholders and the stock has taken a hit as a result. It trades at a price-earnings ratio of just seven times trailing 12-month earnings and six times forward earnings. We like them because they have a strong worldwide franchise. And we like the fact the regulators are requiring them to strengthen their balance sheet. It will be an improved bank afterwards.
(Lewis Braham is a freelance writer based in Pittsburgh.)
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