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Just two years old this week, the $161 million J.P. Morgan Global 50 Fund launched a worldwide search for the 50 best large-company stocks. The goal: beating the market without taking extra risk. So far, so good: Through April, 2000, the fund's average annual return stands at 18.8%, more than three percentage points higher than its benchmark, the MSCI World Index. Through May, 2000, the fund this year dropped 5.7%, a bit better than the index' 6.1% loss. To see what the fund has been buying, selling, and holding lately, I reached co-manager Shawn Lytle by phone this week in Morgan's London office. Though tempted by the suddenly cheaper technology shares in the U.S., Lytle and co-manager Andrew Cormie continue to find better values in Europe and the Far East. For more on all that, here are edited excerpts of our conversation:
Q: How do you find stocks to buy?
A: Instead of thinking of the world as different regions and then trying to pick the best companies in the U.S. and Europe and Japan, we think of the world as 19 different [industry] sectors. [We] forget about the regional concerns and really try to pick the best companies in each one of those sectors based on what our analysts' fundamental valuation tools are telling us.
Q: What's your biggest position right now and why?
A: Philips Electronics (PHG). This is a stock that was not in the initial portfolio for Global 50, but we bought it soon after, in August, 1998. It had seen a significant sell-off in the market turbulence of the Asian crisis and the Russian ruble devaluation. Basically, there was a big sell-off across Europe in technology stocks. Philips became to us very attractive. It was restructuring its operations and cutting a lot of costs. It is, of course, the No. 1 semiconductor manufacturer in Europe, and at that time, we were seeing the bottom of the semiconductor cycle globally.
Q: Is it now time to sell Philips?
A: No. Philips is a diversified company. It has semiconductors, it has the consumer-electronics business, and that's a business that they have reengineered and come up with a lot of new products with nicer designs, sexier designs. What has really surprised the Street and helped to drive the performance of the stock the past several months is the positive news we've been hearing on the mobile-phones side. It looks like that business is going to break even faster than the market thought it was, so that has helped the stock over the past several months.... That's why we still see some upside potential in the stock, even though the stock is up some 45% year to date.
Q: How much of the portfolio is in Philips now?
A: Right now, it's about 4.1%.
Q: Sony (SNE) was your biggest position at the start of the year. What's happening there?
A: We have seen a sell-off in that stock. Sony is a story of a lot of investor euphoria prior to the launch of PlayStation2, which met expectations. And it sold, what, a million units the first day in Japan? We continue to be very comfortable with it. With the launch of PlayStation2 in the third quarter in the U.S. this year, going into the Christmas season, we think that will provide the stock with another boost. Clearly, we need to see a little more stability here in the Japanese technology sector and in the Japanese market.
Q: Is it still a top holding?
A: We cut it back in February to a 2% position. We see the PlayStation2 as a significant driver of growth. They're doing Internet deals now with different companies, and they really see over the next couple of years the PlayStation being the conduit through which the masses get on to the Internet. It has the power of a PC -- and Microsoft (MSFT) clearly is seeing this as a threat, because they're now trying to manufacture their X-Box to compete in this space.
Q: How about Cisco Systems (CSCO), another large holding at yearend?
A: We still have it in the portfolio. It's still the only U.S. tech stock that we do have, though with the sell-off in the market it may be time to look at some other tech stocks in the U.S. When we made our U.S. technology bet, it was focused on companies that we see as having very strong earnings visibility and a very clear market-leadership position. Last year, we held EMC Corp. (EMC), in data storage, for half the year and then we moved into Cisco. It ran in the beginning of the year, of course. It was up to about 3.5% or 4% of the portfolio. We cut it back. We got lucky in terms of the timing, we were able to cut that back before the big sell-off.
Q: What have you dropped from the portfolio recently?
A: We just sold China Telecom (CHL). It was a stock that we liked in the wireless space. Clearly, in China it had the leadership position. We decided to sell it based upon some short-term concerns over their market share, because there's another player that's coming into the market in China in the next month. We are still, though, very positive on the wireless space, even though wireless stocks have underperformed here, with the market sell-off. We continue to have a very healthy position in wireless providers.
Q: You had a big position in Mannesmann (MMN), which Vodafone AirTouch (VOD) has taken over. How did that play out for you?
A: Very well. We bought Mannesmann last June. The stock had underperformed other European telcos in the short term. We had a good opportunity last summer to buy in -- thinking that they had a very, very strong footprint in the European wireless market, that they were a merger candidate, that [a buyout] was a possibility. But [we] didn't know who the player might be or when it might happen. Fortunately for us, the Vodafone deal came along. We did very well on the deal. I think the return on that one was in a range of 90% or 100%.
Q: Did you sell out your shares, or do you now hold Vodafone?
A: We now hold Vodafone. Vodafone as a company, long term, is the best-positioned wireless stock in the world. It has very strong assets in Europe [and] ventures with Bell Atlantic (BEL) in the U.S. We think it [has] 45 million subscribers, or probably more at this point, worldwide. If you think of that relative to America Online (AOL), AOL has 25 million. In a few years' time, those are 45 million sets of eyes and ears that are going to be tapped into the Web over their mobile phones.
Q: What have you added to the portfolio recently?
A: Time Warner (TWX), as a nice proxy into the combined AOL-Time Warner company. It was selling at a discount. We do think that this is a very strong combination of both content and access. We think that the AOL model is very strong, and you can value the company the way you'd value a cable company...and it's very attractively valued.
Q: What else have you bought?
A: We haven't made that many changes the past two to three months. Takeda Chemical, though, is a company that we had been eyeing and our Japanese health-care analyst had been pounding the table on. We added it to the portfolio in the beginning of February. Takeda Chemical is one of the larger pharma companies in Japan. It again has a very strong cost-cutting or restructuring story. And it clearly is focusing on the pharmaceutical side of the business. They have a very strong diabetes drug that they're marketing in the U.S. under the name of Actos. It's doing very well now that Rezulin is out of the market from Warner Lambert (WLA). We think that can be a very successful drug not only in the U.S. market but also in the Japanese market when it's launched. The company also has some other drugs in development that will do very well.
Q: What else about the fund?
A: If you look at the allocations of the portfolio today, about 23% is currently in the U.S. If I were to take Europe plus [Britain], that weighting goes up to almost 40% of the portfolio, and 18% in Japan. So we have continued to find better values outside the U.S. The only other thing I would say is we just try to have patience. There are a fair number of names in this portfolio that we've held since the inception of the fund. We look for consistency, and we're not going to add extra risk just for some short-term concerns.
Robert Barker covers personal finance for Business Week EDITED BY BETH BELTON
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