The Case for Investing Overseas

Growth-fund manager W. George Greig argues that emerging markets have the most potential now, and they're undervalued

These days, it's hard enough to get mutual-fund investors jazzed about U.S. stocks -- let alone the great unknown of offshore markets. That's unfortunate, says W. George Greig, who manages the William Blair International Growth Fund. He believes that Asian and European equities are poised to pull ahead of domestic stocks this year.

His reasoning: The bull market that raged in America was shorter and tamer overseas, so the bust cycle there is expected to be muted as well. Also, the technology inventory buildup was of a lesser magnitude overseas, so the rebound there will kick in much sooner. And here's the most compelling argument: When you compare international growth stocks in almost any sector to their American counterparts, they're selling for a song.

Greig joined Blair in 1996 and has taken over the day-to-day management of the fund with considerable success: The $550 million William Blair International Growth Fund (WBIGX ) boasts a five-year annualized return of 13%, one of the best records in its peer group, according to Morningstar, which ranks it a five-star fund.


  Greig has positioned his Chicago-based fund with measured bets in European markets and an aggressive stance in Asia. He has allocated about 29% of the portfolio in Europe, excluding Britain, compared to a weight of 41% for its benchmark, the MSCI All Country World Free Ex-U.S. Index. He's mostly piling into emerging markets, which he says are stable and extremely undervalued compared with developed markets. His fund has a 17.3% stake in Asia, excluding Japan, almost double the benchmark's weighting.

Greig has proven that he can beat the competition: In 1999, his fund earned 96% -- about double the peer-group average. By the same token, his losses in 2000 and 2001 were less than the average for the international growth category. His fund dropped 13.66% last year -- far better than the benchmark's 19.5% loss. Considering that the fund's 12.3% fourth-quarter return also edged out the MSCI benchmark, Greig's fund looks well positioned to reap new rewards as the worldwide economy improves and overseas markets snap back. Through Mar. 19, the fund is up 2%.

BusinessWeek Markets & Investments Editor Mara Der Hovanesian recently caught up with Greig to discuss his style of investing, what impact the war on terrorism has had on his work, and what stocks are among his favorites. Edited excerpts from their conversation follow:

Q: Right now, investors are wary when it comes to U.S. stocks. What's so compelling about looking overseas?


Investors have been through a decade-long cycle where the U.S. market has outperformed and American companies set the standards for profitability. And the dollar is in year seven of an upswing. You look at [those factors] and think, "Why bother looking at international companies?" But last year, emerging markets outperformed both the U.S. and the rest of the world, and have continued to do so this year. Investor perception is that they would not.

Investors should think of emerging markets as being the world's growing suppliers of goods, so when world demand begins to turn around, emerging markets will do very well. If you look back in the early recovery cycles of the 1990s or 1980s, emerging markets surged immediately following the recessions of those periods.

Q: What's the outlook for corporate profits among growth stocks in international markets?


The U.S. has hit a bump in the road. Reported profits are being called into question, people are trying to reconcile the accounting, and goodwill needs to be written off the books. You don't have these issues in international markets. Also, domestic demand [in those markets] is still strong.

Just to take some big examples -- India, Korea, and China: Their domestic economies stayed quite strong even when the global export cycles dipped. Their governments and the financial industry decided to shift credit from the corporate sector to the consumer sector, where there was pent-up demand. The banks see an opportunity to make more money by lending to consumers. I think you can see that movement in Europe and possibly Japan.

Q: What are the prospects for the U.S. dollar?


A lot of what happened in the late 1990s was a result of capital flight from emerging markets and the opening up of international investing opportunities to Europeans. Both of those things are probably past their peak, and that'll probably lead to some weakening in the U.S. dollar over the next several years.

Q: What economic sectors globally do you anticipate will perform well in the next year or so?


There has been a lot of anticipation of improvement in some cyclical stocks [in the U.S. market], but...investors have been overpaying for them. If you're looking for earnings, why not buy where the value is better and where you might have some cyclical long-term improvement to look forward to?

I think that some consumer areas that you might ordinarily consider to be defensive [plays] will still benefit internationally from a pick-up in consumption. I'm not worried about holding a stock like L'Oreal (LORLY ) because it's a global leader, there isn't a U.S. competitor, and the top line is growing.

On the other hand, big global pharmaceuticals are under some longer-term cyclical pressure in terms of pricing and patents. Pharmaceuticals might be considered defensive, but I think [the sector] is getting more risky. I'm looking for something with more upside and less risk.

Q: Have the political climate and the war against terrorism changed the way you're viewing worldwide economies and investments?


The terrorist threat has changed the way the U.S. and multilateral institutions have thought about emerging markets. It has changed the relationship between the U.S. and China for the better and clearly made a big difference in the relative importance of solving financial problems in Turkey vs. Argentina.

I think that the terrorist threat could be a factor over the rest of this year, [but] not knowing what is going to happen is the market's biggest problem. You can't make an assessment of how [an unknown threat like terrorism] can affect the markets or what the market can do about it.

Q: Tell us about some of your favorite stocks right now.


One of our biggest single holdings is Samsung Electronics (SSNLF ) in South Korea, which is my model of what a tech stock should be. The best end-markets for technology products have been in the consumer area, and to a lesser extent the industrial end-markets, as opposed to the computer and telecom markets. Samsung is the best positioned overall in terms of its semiconductor exposure as well as in its market share in displays and cellular phones. It's also the low-cost producer of DRAMs, which is the area that's cyclically recovering the fastest right now.

We got into it around November for an average cost of about $175 a share, and it now trades at around $250. It's still a cheap stock -- it sells at around 14 times this year's earnings.

By comparison, look at Texas Instruments (TXN ). You can't even measure this year's earnings because they're so low. The stock trades at about 45 times next year's earnings.

Another stock we're bullish on is Global Biochem Technology (GBCMF ), a Chinese producer of corn products, such as cornstarch and corn oil. Basically the idea here is that as China becomes urbanized and an industrialized nation, there will have to be a higher-scale industry for processed foods and beverages.... You wouldn't be too interested in the U.S. versions of these companies, because the growth is so incremental. But in China this is a high-growth, high-profit kind of market. Our average cost on the stock is $0.24 and the price today is around $0.33.

Global Biochem and Samsung aren't stocks we think can go up 20%. They're stocks we think they can go up 50% to 100% from here.

Edited by Patricia O'Connell

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