Online Extra: How Driehaus Does It
Lynette Schroeder liked her old job as manager of the Driehaus International Discovery Fund (DRIDX ) so much that she returned to the $625 million portfolio last March after a six-year stint managing international money at rival American Century. The Driehaus fund, which is A-rated by BusinessWeek in the foreign stock category, has blossomed under Schroeder's management, gaining 30% in 2005. Personal Business Editor Lauren Young recently spoke to Schroeder about managing risk in the dicey international markets. Edited excerpts of their conversation follow:
How do you manage risk in the portfolio?
I'm not one those fund managers who are very quantitative and have defined measures of risk. We do consider risk as we look at individual stocks, but there are no definitive cutoffs such as a range in price-to-book. As long as we see a company that's showing accelerating earnings, it is a potential investment.
But we do have some risk parameters. We tend not to get particularly focused on specific stocks -- the fund generally has about 85 names. We tend to buy only 2% to 3% of a stock, and we won't buy more than 5%.
There are some risk parameters associated with weighting of a sector or country relative to our benchmark, the MSCI Growth Index. We won't go bigger than the country allocations in that index. We also tend not to have more than 30% in the emerging markets. Right now our exposure is about 15%.
Why don't you want a bigger emerging-markets allocation? Aren't those some of the hottest markets?
If people want pure emerging-markets risk, they can buy emerging-markets funds. We have the whole world to invest in.
When I took over the fund in March, we had a high emerging-markets weighting. But I liked Japan far more than I liked the emerging markets. Now, I've gradually been increasing our weighting in the emerging markets.
Where do you see the best plays in the emerging markets?
I'm more focused on Asia, including Korea, Taiwan, and Thailand. We're finding stocks that fit our earnings model, and we are seeing strong earnings reports, especially from the Northern Asian countries.
There are two catalysts. There's some local or regional domestic demand as economies improve, but the big top-down piece of it is that as oil stabilizes in terms of price, it allows consumers to spend less on heating and spend more in restaurants or stores. We are also seeing economies pick up on the tech side, since there's a global demand for consumer electronic goods.
What do you like about Japan?
We've been bullish on Japan, and we continue to be. But I'm not as enthusiastic about real estate in Japan. I like retailers better, including ABC-Mart, a shoe retailer, and Point, a clothing chain. I also like construction equipment manufacturers Komatsu, Okuma, and Hitachi Koki since Asia is in the midst of a building boom.
What kind of companies do you like, big or small?
About 90% of the names in the fund have market caps under $5 billion. And the average weighted market cap is closer to $1.5 billion.
What about Europe?
For the past couple of months, we've been gradually increasing weightings in developed Europe. The top line started to grow again. For example, Norwegian retail sales are improving. In Germany, industrial production is improving. Unemployment across Europe is at a three-year low. The market is telling us things look better.
Edited by Patricia O'Connell