Momentum has shifted, but smart buyers won’t abandon the opportunities overseas. See how top international fund managers are earning their keep.
The cat’s out of the bag: US stocks are the new catnip, foreign equities more like cat litter. The US has stimulative deficit spending including the recently approved payroll tax holiday, high productivity, and extremely competitive, globally-sourced companies.
Meanwhile, emerging markets are laboring under an inflation scare.
Europe consists of countries that have been bailed out, countries that will need to be bailed out, and Germany. (The rest of northern Europe’s pretty cozy too, but there’s no arguing that the European Union has major structural problems that will need to be tackled sooner rather than later.)
Australia’s flooded and soggy in the financial sense, too, as a result of sky-high house prices and consumer debt. Japan is still Japan, notwithstanding early signs of a revival. China’s got wasteful government meddling and the resulting construction bubble. Russia’s a one-trick pony fired by oil and corruption. Mexico is barely governable, thanks to drug cartels. Everywhere a potential investor turns, troubles, and risks seem to abound.
Zigging as the Market Zags
The seemingly fashionable preference for US equities is actually a contrarian call, based on the behavior of US mutual fund investors. Since the beginning of 2007, they have withdrawn $318 billion from domestic stock funds, while plowing $150 billion into overseas equities.
So add another danger to the list of those lurking overseas: that if investing preferences ever truly reverse, plenty of late-arriving cash could flow out of overseas markets. Add in the fact that so many of the most popular ETFs hold the same widely known foreign stocks, and you have a recipe for a scary moment or a terrible month or two if everyone should try to exit at the same time.
On the other hand, US investors remain hugely underweight overseas equities relative to their economic and financial weight. So the question ought to be not how to retreat from overseas but how to remain there while outperforming those markets. And that requires shifting from those super-convenient ETFs to stock-picking among relatively unknown companies.
Toward that end, I have some picks ready to click. Or rather, I have the best ideas of the hottest international fund managers around. It’s well-known that the hottest mutual funds tend to outperform the following year as well. I would bet that those manager’s top bets also don’t end up doing too shabbily. At least, and perhaps at most as well, top holdings of the top mutual funds are a good departure point in the search for strong stocks off the beaten track, because those are what ultimately drive the outperformance of those funds.
Fund: Janus Overseas (JAOSX)
Investment Style: Large Growth
Distinction: Returned 19.3% last year plus another 3.2% month-to-date; manager Brent Lynn named Morningstar international stock manager of the year.
Top Holding: Li & Fung (Hong Kong: 0494)
The key supplier of merchandise to Wal-Mart (NYSE: WMT) and a bevy of other US retail chains, Li & Fung is the world’s top procurer of consumer goods and one inexorably moving up the value chain into brand management, at home and abroad.
For the purposes of this exercise, ignore trailing price/earnings ratio of 45. Focus instead on the 1.7% annual dividend yield, the 20%-plus return on equity and, most important, the 60% return over the last 12 months, including 10% so far this month. It’s worth noting that Wal-Mart shares have broken out as well. As retail prices begin to rise, Wal-Mart and Li & Fung can expect more shoppers to head their way, and will have room to lift their own profit margins.
Fund: Oppenheimer International Small Company (OSMAX)
Investment Style: Small Growth
Distinction: Returned 36.6% over the last year, and 14.7% annualized over the last ten.
Top Holding: Opera Software (Oslo: OPERA, OTC: OPESY)
For a $570 million company, Opera has a lot of irons in the fire. Its desktop browser maybe a static also-ran, but the mobile versions running on phones (and, now, tablets) are growing rapidly and taking share from the likes of Nokia (NOK) in emerging markets.
Sales in the most recent quarter were up 35% year-over-year in constant currency for this spinoff from the incumbent Norwegian telecom Telenor (Oslo: TEL, OTC: TELNY). Manufacturers like Sony (NYSE: SNE) and Philips (NYSE: PHG) have signed deals to bring the Opera browser to their Internet-capable television sets. The Olso-traded shares rallied from a low near NKR16 in November 2009 to NKR 30 a year later. Now they’ve pulled back to NKR27.40. The company pays a modest dividend, but if its mobile browser maintains its current growth rate the 0.6% yield should remain an afterthought.