Large U.S.-based multinationals can give investors exposure to global markets without taking on the extra risk of buying foreign stocks. That's Tom Laming's strategy for his Buffalo USA Global Fund (BUFGX). The fund manager holds exclusively American companies with worldwide reach, such as Microsoft (MSFT) and McDonald's (MCD). Avoiding foreign stocks, Laming believes, limits the fund's exposure to riskier equity markets.
Laming picks his holdings with a top-down approach that attempts to identify major competitive trends and then finds the U.S.-based companies that would benefit most from those movements. Profitability is more important than growth, he says. The fund manager's long-term perspective contributes to a very low turnover rate.
Buffalo USA Global's performance is well above that of its peers, helping it earn a 5-STARS
overall rank from S&P. In the 12-month period through February, the fund lost 5.3%, vs. a 17.7% drop for its large-cap growth peers. For the three-year period, the fund showed an annualized gain of 10.1%, while its peers lost 5.3%. During these one- and three-year periods, global funds were down 16% and up 0.7%, respectively.
Bill Gerdes of S&P's FundAdvisor recently spoke with Laming about the fund's investing strategy, top holdings, and recent portfolio moves. Edited excerpts of their conversation follow:
Q: What's the premise behind the fund?
A: When we considered starting an international fund in the mid-1990s, we recognized that many U.S. companies were benefiting from worldwide growth. In many global sectors, U.S. companies, whether in chewing gum or computers, are virtually the only investment choice.
The fund holds only U.S.-based companies that receive at least 40% of sales or income from outside the U.S. This strategy also has cost benefits, since the fees for global funds are almost always higher because of traveling and translation expenses.
Q: How do you pick stocks from your investible universe?
A: We identify larger trends over a three- to five-year horizon and try to determine the beneficiaries. The next step is to look for stocks with fair valuations. One trend we've followed is the shift to digital cameras, from traditional cameras. Analog Devices (ADI) should benefit from this trend. Digital cameras will wipe out traditional cameras just as personal computers wiped out typewriters. (See Editor's Note", below.)
Another trend is the growth of U.S.-branded products overseas. For example, studies have shown that as a country's per-capita GDP grows, it gets more McDonald's restaurants.
Q: Your strategy suggests high-profile multinational companies. How do valuations enter into your process?
A: With valuations, we focus more on profits than growth. We'll only buy a company if it has high net margins. Microsoft, one holding, trades at 10-times sales, while Wal-Mart Stores (WMT) trades at only one-times sales.
At different times, some stocks look cheap. Right now technology, particularly semiconductors, is cheaper than it has been in awhile. That wasn't the case two years ago when we sold our technology positions. About 45% of the fund is currently in technology.
Q: What's your view of semiconductors?
A: Semiconductors are a boom/bust industry. We've just gone through the biggest bust ever for semiconductors. Every bust is followed by a boom. Revenue is weak at the bottom of the cycle, but that sets the industry up for a boom as companies ramp up to rebuild inventories.
We own semiconductor companies all the way down the industry supply chain: National Semiconductor (NSM), Intel (INTC), and Micron Technology (MU).
Q: How do you deal with risk since global markets tend to be volatile? Do you hedge?
A: To reduce risk, I only buy on U.S. markets. For instance, we would invest in a company with sales in Malaysia, but we won't trade on the Malaysia stock exchange.
In general, a weak dollar would help the fund, but we don't hedge. We rely on our companies to hedge. Who would do a better job of hedging -- we or the CFO of Intel?
Q: Do you think the fund could be hurt by anti-Americanism overseas or an international incident?
A: The biggest risk to our approach would be a backlash against the U.S. from overseas, such as in the Middle East or from French farmers. There are always minor skirmishes, but the long-term trends toward freer trade are in our favor.
Q: Do you think there's any danger that the period of dominance the U.S. is experiencing may turn out to be fleeting, such as Japan had in the 1980s?
A: For the U.S. to end up like Japan, we would need much more government intervention, which is unlikely. That's why the U.S. market outperforms over the long run. For the last 100 years, the U.S. has been by far the best market. I don't think that's an accident.
Q: Your turnover is relatively low.
A: That's because the long-term trends we follow don't change very often. I'm very confident that digital cameras will take market share and that U.S. brands will spread overseas.
Q: What are your largest holdings?
A: As of Mar. 15, they were Lear Corp. (LEA), Johnson & Johnson (JNJ), Bristol-Myers Squibb (BMY), McDonald's, and Agilent Technologies (A).
Outsourcing is driving Lear. An auto-parts contract manufacturer, Lear has been able to grow as auto companies spend more time on design and marketing and less on manufacturing.
Q: What's your outlook for global markets?
A: This is a time for opportunities, not bearishness. The time to be pessimistic was in late 1999 and early 2000, when valuations got out of hand. Now, the capital markets won't invest in new companies, but freer trade and recovering economies will drive world markets higher. Slowly, capacity utilization will also be rebuilt.
Editor's Note: An earlier version of this story carried an incorrect reference by Laming to the status of Eastman Kodak's credit rating. Kodak's commercial paper carries an A2 rating from Standard & Poor's, while its senior debt is rated A-; Moody's Investors Service rates the company's commercial paper P2 and its senior debt Baa1. All of those ratings are considered investment grade.