Vontobel Funds: Have Cash, Will Travel


Investing outside the U.S. may have its risks, but it can also produce better returns these days in some cases. Rajiv Jain, manager of international investments for the Vontobel funds, points out that Vontobel's emerging-markets fund has grown nearly 7% a year for the last two years, while the S&P 500 has been in negative territory.

Jain leans toward stocks in consumer nondurables, notably Cadbury Schweppes, as an example of a high-quality growth company with a reasonable valuation. Some 25% of his investments outside the U.S. are in Britain, with France and Switzerland representing 10% each. His choices have escaped the Argentine crisis by dint of having no stakes there, but he does favor investments in Brazil and Mexico.

In Jain's view, the U.S. investor can do better investing directly in foreign markets than by relying on U.S. multinationals for global exposure. That way, there's a chance the foreign markets will be up when bourses at home are down. Jain made these remarks in a chat presented Feb. 21 by BusinessWeek Online on America Online, in response to questions from the audience and from BW Online's Jack Dierdorff and Karyn McCormack. Following are edited excerpts from this chat. A full transcript is available from BusinessWeek Online on AOL at keyword: BW Talk.

Q: Rajiv, before we go globe-trotting, what's your macro view of the U.S. stock market as it blows hot and cold? Are you optimistic?

A: Longer term, I'm extremely optimistic. Short to medium term, it's much more difficult to make a call either way. But the valuations are not cheap. So we're relatively cautious.

Q: Can you tell us about your top and favorite holdings? And a little about how you pick stocks?

A: Currently, some of the areas where we're finding good opportunities are in consumer nondurables in Europe. These are actually extremely high-quality franchises that have been around for a long time but tend to be in relatively mundane industries. Therefore, they've been shunned by the market for some time.

For example, we have a reasonably big position in Cadbury Schweppes (CSG), which we began purchasing about one month ago. This company has been around for more than 200 years. In the last two decades, it has grown in high single digits. It continues to grow at that rate. And it's still selling at 15 times expected earnings.... Our whole emphasis is to pick high-quality growth companies which are selling at reasonable prices.

Q: Japan's stock market surged higher today. Do you think the economy there is ready to recover? And do you own any Japanese companies now?

A: In all the international products at Vontobel which I manage, we have about 12% in Japan. Having said that, that's purely a reflection of what we're finding on a bottom-up basis. Clearly, we're extremely concerned about the macro risk in Japan. And it's hard to make a case for the Japanese economy, or the banking system, to turn around anytime soon.

Q: Beyond the 12% in Japan, how are the international investments allocated elsewhere around the world?

A: Our biggest exposure in the fund is in the U.K, with nearly 25% of the portfolio. One of our most recent purchases has been Morrisons, which is one of the larger grocery chains in the U.K. The company has grown at double digits for more than two decades, and it continues to deliver double-digit growth even in the midst of a recession. The stock is selling around 18 times earnings, and we believe it can continue to grow at 11% to 12% over the next five years. The other big exposure we have is France and Switzerland, with nearly 10% each.

Q: What about the emerging markets? How are they doing generally, and do you have any good bets there now?

A: We're extremely positive on emerging markets in general. They represent some of the best risk/reward opportunities on a worldwide basis. At Vontobel, we run some dedicated emerging-market products. They did extremely well last year and have delivered positive returns this year in a very difficult environment. Some of the best opportunities we're finding tend to be in Korea. We have, in our emerging-market fund, 30% in Korea -- compared to the Morgan Stanley emerging-market index, which has 17% in Korea.... If you look at the valuation of these markets, they're still selling at single-digit multiples.

Q: Did you get burned at all by the financial crisis in Argentina? Any investment hopes there?

A: Well, fortunately, we didn't have any investments in Argentina. That wasn't because we were smart to make a macro call, but because we couldn't find any investment opportunities on a bottom-up basis. From our perspective, the situation is still too fluid,and the risk too high to invest anything there now.... In the Vontobel emerging-market fund, we do have fairly big exposure to Mexico and Brazil, with nearly 11% in each country. One of the best names we like in Brazil is Souza Cruz, which is the largest cigarette company in Brazil, yielding more than 15%, with double-digit earnings growth, and the stock is still selling at six times earnings.

Q: Some investment advisers say the way to play global growth is to buy stocks of U.S. companies with a big international presence. What do you think of that approach?

A: That's definitely one approach which could give you reasonable returns in the long run. But the correlation with the domestic market will be much higher than if you buy stocks or mutual funds directly abroad. So for diversification purposes, you're still better off having some percentage of your assets invested outside the U.S. For example, in the last two years, the Vontobel emerging-market fund has returned nearly 7% per annum. At the same time, the S&P has had a negative return.

Q: Can you comment on the cell-phone sector and Nokia (NOK) specifically?

A: The cell-phone market, for most of the developed countries, is getting very saturated. The growth is coming from the phone-replacement market, not from new-handset sales. So we're not that optimistic of the future opportunities in that area -- at least for the next couple of years. On Nokia specifically, we currently don't have any position on that. But it's the best-run company in that sector, bar none. It has the highest margins and continues to be extremely profitable. But the valuations are much too high for the growth that it could possibly deliver.

Q: Are there any buys in the wireless sector?

A: Currently, we aren't finding any new opportunities in the wireless sector. One of the names we actually like is a combination of wireless and wireline: Telecom Indonesia. There's still a lot of growth there, and the stock is selling around six to seven times earnings. It also trades on the NYSE.

Q: Do you like any tech stocks abroad now?

A: We have not added any new names lately in technology, as some of the names we like have run up sharply since their September lows. There are a few names that we like -- it's just that the prices are too high for our taste.

Q: Have you seen any Enron-type accounting questions yet in companies you watch outside the U.S.? Is there a danger of investors losing confidence abroad, as some have here?

A: That's a constant worry of ours on a daily basis. There have been a few cases, but not Enron-like debacles.... Corporate governance has actually been improving internationally, but clearly from a much lower level than in the U.S. The good part is that the Enron debacle would force the companies, investors, and regulators, and every other stakeholder to tighten up the screws and pay much closer attention to accounting issues in general.

Q: You told us earlier you like some U.K. consumer stocks. Are there any other stocks (or sectors) that you like now?

A: As I mentioned, the area in general where we're finding good growth opportunities with reasonable valuations is more consumer staples. Some of the other names, such as Nestl? in Switzerland, Unilever in the Netherlands, and Swedish Match in Sweden still look fairly attractive to us.

Q: How about specific names in the Korean market you like? And are your favorites (anywhere) available to the average investor in the U.S. via American depository receipts?

A: A number of Korean companies have ADRs listed in the U.S. Of those, the one which looks exceptionally cheap -- and we do own it -- is Kepco, the largest electric utility company in Korea. The stock is selling at nine times earnings, around 3.5 times cash flow, at 40% to its book, and on a longer-term basis offers exceptional value as the Korean electricity business is deregulated.

Q: What percentage of assets should investors be allocating to international holdings?

A: That really depends on one's overall allocation to equities and risk tolerance, because these markets tend to be more volatile than in the U.S. I'd also like to make a disclosure that a number of names mentioned are already part of our funds, and we may be actively involved in purchasing or selling those names. For more information on our funds, you can visit www.vusa.com


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