Coaching a High-Performing Fund
Running a fund with 60 best ideas from around the globe is like coaching a sports team, says Iain Clark, leader of the Henderson Global Investors International Opportunities fund (HFOAX). From his perch in London, he gathers 10 to 15 stocks (bought on the local exchanges) from five other portfolio managers: Stephen Peak and Tim Stevenson in London pick European stocks (60% of the fund), Andrew Millward in Tokyo (21%) covers Asia, Andrew Mattock in Singapore (14%) has Asia excluding Japan, and Ian Warmerdan chooses global tech stocks (5%). His latest moves include trimming holdings in China, given that market's "frothy" gains, and he's considering raising his stakes in Japan and global tech stocks.
To get winning results, Clark makes sure his largest holdings are different from his competitors every quarter. For example, Morningstar data showed that 43% of foreign large-cap blend funds owned Roche Holdings as one of their top 10 holdings at the end of 2006. Other widely owned top holdings in other funds included Toyota (TM), GlaxoSmithKline (GSK), and Nestlé. "This is a high-quality list, and you'll sleep very well at night," Clark says. "Trouble is, you're going to perform a bit in line with the index."
Against the Grain
In his fund's top 10 list, the one most shared is Fresenius (FRE), but only 3.5% of peers have this stock as a top 10 holding. Other large holdings are Saipem, Puma (PMMAY), Deutsche Post, and Adecco (ADO). "We're not trying to be different just for the sake of it," he says. "We think we can find better companies because we're picking a limited number."
Clark's strategy has catapulted Henderson Global Investors International Opportunities to the top of its class. Since its inception in August, 2001, the $2.6 billion fund has returned 20.2%, making it the No. 1 fund in its category, according to Lipper, and beating the average peer by around 8 percentage points. In 2006, the portfolio returned 28%, 3.2 percentage points above similar funds, according to Morningstar. Clark says strength in Chinese, European, and Asian (excluding Japan) stocks helped offset weakness in Japan.
BusinessWeek.com's Karyn McCormack spoke with Clark on Mar. 27 about his playbook for his winning fund. Edited excerpts of their conversation follow.
What's your investing strategy?
The way we set it up is quite important, because I think that's part of the reason for our success. We bring to the U.S. our best ideas from five portfolio managers. Three of the five managers can hold no more than 10 companies in their portfolio, and the other two can do up to 15, so the maximum number of stocks in our portfolio is 60. So it really is trying to get a very concentrated list of the best ideas.
My role is sort of a coach of a sports team. I select the team and set the strategy, but I do not pick the stocks. I allocate the amount of money that goes to each one of them.
Have you made any changes recently?
I have been, since December, slightly reducing the Asia ex-Japan weighting in favor of Europe. And I'm looking to increase my Japan weighting, but haven't done it yet. When do we move, it's not huge—I don't move 10% from one space to another in short order. I'll make some bets, but they're more 5% bets, not 20% bets.
Why would you increase your investment in Japan?
In the five years since we've run the fund, Japan has been a major laggard. It had a very good year in 2005, but otherwise has been poor. Last year, it was a huge underperformer—not only was its stock market flat while most other markets were up 10% to 20%, but it's currency has also been quite weak whereas virtually everything else has been strong against the dollar.
I don't run a contrarian policy, but I do like to look at things that have underperformed and consider adding to them. I think corporate profits have some reasonable potential to grow. Local profits in Japan have done well in the last three or four years, but they've not done as well as both the U.S. and Europe.
Plus, M&A [mergers and acquisitions] and private equity, one of the big drivers of stock markets both in America and Europe, is beginning to happen in Japan. If it wasn't for the politics and social aspects involved in it, Japan is the best opportunity for private equity. There are a lot of very undervalued companies, some with decent cash flow, a lot of undervalued assets, and of course, very low interest rates.
However, you have politics and social aspects to consider, and that means you can't just go in there gung ho. Nonetheless, if you are clever, there are deals to be done. We're seeing the number of deals beginning to increase quite nicely. It's not yet having an impact on the market, but I think it can grow and will probably become significant over the next five years. Also, they've changed the rules—starting in May, foreign companies will be allowed to use their own paper to take over Japanese companies. Other things need to go right for the stock market to do well, but it is telling you that we're going to see more activity.
What are some of your largest holdings?
Inditex is the Spanish clothing company with the brand Zara. It's just been a spectacular success. They had results last week that were very good. It's a great stock, but it's not cheap. We've owned it in this portfolio for three or four years. It's still got lots of growth potential, but the stock is at the higher end of its valuation range and is not one to be chasing now.
We own Fresenius—it owns 40% of Fresenius Medical Systems (FMS) and 70% of profits come from the medical company. Many Americans might know Fresenuis Medical Systems, because its main business, kidney dialysis, is in the U.S.
We think that not only does the kidney dialysis business look very good and will continue to grow rapidly, but they also own care homes, and there's quite a big change going on in Germany where the private sector is getting involved. They're also in vitamin supplements and other health-care products. All three of its businesses are growing rapidly. It's an extremely well-managed company. This is the sort of stock that in almost any background, it will continue to grow. Again, it's not cheap—it's 20 times earnings and earnings growth should be 20% to 25%, so it still looks reasonably priced. And I think the quality of earnings is extremely good.
We also own Capita. Trouble is, it falls in the same category as Inditex—great growth, terrific company, superbly managed, but it's expensive now. It's service outsourcing—they administer the whole process of collection of taxes, so it's all back-office-type administration. It's very under the radar. They're the largest in the industry. It's one of our top five longest standing holdings. It's still attractive but it's not cheap now.
Do you have any new holdings?
Parmalat—everyone knows it because of the major scandal. Despite all the shenanigans, its basic business, dairy products, has continued to do quite well. I buy their tomato juice. In our view, the stock is valued based on that business. The reason we're interested is it's a litigation story—that's where the upside comes from, and we think there is relatively minimal downside. The really big cases are Parmalat against the U.S. investment banks. We're talking a billion dollars here and there—these are material. Parmalat's market cap is $3 billion to $4 billion, so if one of them gets settled it's quite significant. Equally, there's a class-action suit against Parmalat.
We're not law experts, but our view is that they will win some cases. There will be setbacks along the way, but we think that over a couple of years the stock is 25% to 35% too cheap. It's a relatively small holding, and we bought it in the fourth quarter of last year.
What about tech?
I'm quite interested in tech at the moment. For the first time, tech stocks now look mutually valued or even slightly cheap relative to the other stocks I'm hearing about. So I'm beginning to think that I might want to buy more tech. We have SAP (SAP) in Europe, which we bought after its earnings warning about six to eight weeks ago, and TDK in Japan.
One of our holdings is Cisco Systems (CSCO). We're huge believers in broadband and the need for bandwidth, and Cisco sits very well to take advantage of that. And it looks sensibly priced now.
We also own CommScope (CTV). And we own Garmin (GRMN), the satellite navigation company. A non-American tech stock is ASML Holding (ASML).
What about China?
We've gotten a little more conservative and reduced our weighting in China quite significantly. We own China Coal, which we purchased in the fourth quarter last year. Our big winner last year in China was the insurance company Ping An, which we've sold. And we had some real estate stocks. While I like the long-term prospects for China, I feel the market has gotten frothy.