), however, is placing its bets on higher relative performance from foreign companies, particularly in Europe and the U.K. But this fund doesn't assess the economies of individual countries -- it invests strictly on a bottom-up basis, looking for undervalued stocks with visible earnings growth.
The portfolio is managed by a team of investment professionals at Bank of Ireland Asset Management. Michael McCarthy, based in Dublin, is a portfolio specialist for the fund. Year-to-date through March 30, the fund fell about 15.0%, while its benchmark, the MSCI EAFE Index, was down 13.7%. For 2000, the fund slid 10.4%, while the benchmark dropped 14.0%. In the friendlier market environment of 1999, the fund soared 30.9%. (All performance data are in terms of U.S. dollars).
One strategic move the fund made during 2000 was to cut its exposure to Japan in half. At yearend 2000, three-quarters of the fund was in Britain or Europe. Right now, McCarthy likes the environment for financial services stocks in Europe.
Standard & Poor's FundAdvisor correspondent Palash R. Ghosh recently spoke with McCarthy about the fund's investing strategy, and the he likes now. Edited excerpts of their conversation follow.
Q: What kind of stocks do you look for?
A: We are strictly bottom-up stock pickers. We don't allocate percentages of our assets to geographic regions, nor do we invest with regard to industrial sectors. We look for mid- and large-cap stocks (minimum cap size of $1 billion) that are well-established, reasonably priced, and located primarily in well-regulated, liquid, stable markets.
We like fundamentally undervalued stocks relative to their long-term prospective earnings growth rates, historic valuation levels, and their competitors. Such companies typically possess strong balance sheets, proven management, a viable business model, and a strong competitive position in their industry. We strictly avoid start-ups and dot-coms. We must have high confidence in a company's ability to deliver earnings for the foreseeable future. We seek to be fully invested, so we don't "asset-allocate" between cash and stocks.
Q: What are the fund's biggest holdings?
A: As of Dec. 31, 2000, the 10 largest holdings were ING Groep ADS (ING
), 4.5%; Vodafone Group ADR (VOD
), 4.0%; Shell Transp/Trading ADR (SC
), 4.0%; Nestle SA, 2.9%; Aventis ADR (AVE
), 2.6%; Barclays plc ADS (BCS
), 2.5%; AXA ADS (AXA
), 2.5%; Total Fina SA (TOT
), 2.4%; Swiss Re, 2.3%; and GlaxoSmithKline PLC (GSK
Q: What is the current geographic sector allocation?
A: As of the end of 2000, we had 27% of the fund's assets invested in the U.K.; 48% in continental Europe; 13% in Japan; and 7% in Asia Pacific, (excluding Japan).
Q: Given your heavy emphasis on the U.K. and Europe, what is the outlook?
A: At the moment, sentiment in Europe is quite bearish, as it is in all global markets. Given our value discipline and a bottom-up stock-picking process, we are not necessarily bullish on a particular country's market just because we happen to find some attractive investments in that nation.
One of the major issues in Europe is the weakness of the euro currency -- our belief is that the European Central Bank will eventually reduce rates but not as aggressively as the U.S. Federal Reserve has. Last year, some of our European holdings performed very well, largely as a result of our stock-picking process.
Q: How did the portfolio change during 2000 in terms of your sector allocation?
A: In the first quarter of last year, we significantly reduced our exposure to telecommunication and technology because we felt the valuations had become excessive -- notably Vodafone, Sony (SNE
), Royal PTT Nederland ADS (KPN
), and NTT DoCoMo. Vodafone, however, remains a major holding in the portfolio.
But now, given the sell-off among many tech issues, there are some companies in that sector that look reasonable, for example Nokia Corp ADS (NOK
), the Finnish telecom giant. In June of last year, Nokia's stock price reached a peak of 65 euros -- which translates to a P/E multiple of just over 100, compared to a five-year projected annual growth rate of 25%. So, on a p-e-to-growth basis, the stock had a ratio of 4-to-1, which was much too high for our investment discipline. Nokia plunged in price from 65 euros down to about 23. We started buying it in the mid 20s. It now has a much more appealing p-e of 27 or 28.
Q: Why is the European financial services sector a good place to invest now?
A: There is one major demographically based theme at work here: growth in personal savings requires a way to provide a pension plan for an aging population in the developed economies. The provisions for pensions becomes more urgent in Western Europe. We're seeing tremendous growth in mutual fund and personal savings activity in Europe, much like we saw the 401k business mushroom in the U.S. A financial services company like AXA with a global reach is very well positioned to take advantage of this trend.
Q: Has the pace of corporate restructuring been satisfactorily rapid in Europe?
A: Yes. M&A activity in Europe has been very swift, and this has largely been enabled by the euro. European companies are conducting more cross-border deals and are emphasizing a pan-European or even global focus. They seek to become more efficient in order to compete on the global platform. In addition, the retail investment community in Europe is increasingly investing outside of its home countries -- with 11 nations now in the Eurozone, you have no currency risk when you invest outside of your domestic market.
Q: Does the United Kingdom have to adopt the euro for it to be a long-term viable currency?
A: It has survived without the U.K. adopting it so far. The U.K. is in a different economic cycle from the continent, and the interest rates have been out of sync in Britain. If the Bank of England had cut rates down to the level of the ECB, you would have ignited an inflationary boom in the U.K. Aside from economic considerations, there is a lot of political sentiment against the U.K. adopting the euro. The issue of sovereignty is quite important.
Q: Given the virtual collapse of the banking system in Japan, what is your take on investing there?
A: Our exposure to Japan was cut from about 24% at the start of 2000, to about 13% by yearend -- but that was more of a function of our investment style rather than any souring on the Japanese economy. As we cut our stakes in tech stocks, many Japanese equities were thus reduced.
The most important issue with Japanese corporations is that, with a few individual exceptions, restructuring is not happening at a good enough pace. For example, Japanese banks are burdened with excess capacity, and they have not reduced. And some proposals being put forth to solve the banks' bad debt woes are peripheral to the core problem.
Q: What is your outlook for the European stock markets this year, given the worldwide economic slowdown?
A: The negative sentiment in the U.S. will weigh heavily on European markets -- the U.S. market accounts for 50% of the world's markets, so, obviously, it cannot be ignored. Not only are we seeing profit warnings from telecom and tech companies, but also from such stocks as Coca-Cola Co. (KO
) and Procter & Gamble (PG
). However, taken as a whole, the European economy is at an earlier stage of the economic cycle than the U.S. On a relative basis, it will likely outperform the U.S this year.
Macroeconomic factors in Europe are actually quite positive. For example, the levels of consumer debt are far lower in Europe than in the U.S. In addition, Europe is enjoying high consumer confidence and low unemployment. Another facet of this argument is the high level of market exposure in the U.S.; i.e., 50% of American consumers participate in the stock market; by comparison in Germany, this figure is only 20%. If the stock market falls in the U.S., that would have a more dramatic impact on consumer spending. We are also seeing tax reduction programs in some of the larger European nations, like Italy, France and Germany -- this will bolster peoples' incomes. From Standard & Poor's FundAdvisor