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A Fund Manager’s View of Stock Picking
11/07/2011 7:00 am EST
Mutual funds are among the giant institutions that move the market through bulk buying and selling of stocks and bonds. Today, fund manager Lisa Myers shares an insider’s view of that process with MoneyShow.com. She tells Kate Stalter about a top sector pick, and explains why certain big caps are catching her eye.
Lisa, I noticed that you changed the name of the fund a few months ago. Was there also a shift in the fund’s objective and in your investing style?
Lisa Myers: We did change the name, Kate, a few months ago. But, no, there has been no change in either the management, the mandate, or the investment style of the fund.
We really changed the name simply because the fund has three mandates: Capital appreciation, capital preservation, as well as income. Formerly it was called the Templeton Income Fund.
As you can imagine, when you’re in a sliding asset-allocation fund that is dynamic, which invests in both fixed income and equities—particularly global equities and global fixed income... And particularly in a fixed-income market where duration has become less and less important, and fluctuates quite frequently in terms of how that portion of the fund is invested in fixed income... It can be quite difficult, unless you’re willing to commit to a fixed dividend yield to maintain a static or near-static dividend yield on an ongoing basis, quarterly.
So, we just felt that because the fund strives for capital appreciation, as well as income, we found that there was a little bit of misnomer or misunderstanding regarding a fixed dividend payment on a regular basis. So, while we absolutely maintain a mandate of providing income to our shareholders, we wanted there to be a little less of an emphasis on an idea that there would be a fixed income payment on a quarterly basis.
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So, we’re still paying income, but it does fluctuate, depending on how the fund is invested, where the fund is invested, and where we’re finding value in order to drive capital appreciation.
Kate Stalter: I want to ask you just one follow up to that. You did mention the fixed-income holdings in the fund. I notice that a number of them tend to be from Asia and Latin America. Can you say a little about that?
Lisa Myers: Sure. Michael Hasenstab and the Templeton Fixed Income Group run the fixed-income portion of the fund. So, I am not shying from your question, but I’m actually responsible for the equity portion.
So, I’ll explain in perhaps a little bit less detail than Michael might, but Michael and his team have been very proactive on the emerging market. They believe that the GDP growth that the emerging markets have enjoyed will continue. The demographics are favorable there, that much of the political risk in some markets, like Indonesia and Malaysia, have been overblown by the yields that are demanded there.
Consequently, Michael has felt that there’s just a lot of value in that, both on the currency side, as well as on a yield dislocation from the growth and the stability in some of those countries, has been a great way to drive returns. So, he really utilizes many different methodologies to drive capital return.
Kate Stalter: Let’s talk a bit then, Lisa, about the equity holdings. I know that there are a number of techs among your top ten. Can you say something about that?
Lisa Myers: Sure. We’ve been big fans of technology. It represents sort of a theme that is two-pronged when it comes to technology.
One is: You may be well be aware that free cash flow yield across markets and cash on balance sheets of corporate, is something that has been talked about a great deal. Technology companies are among those companies which have a lot of cash on their balance sheets over the last decade.
Since the bursting of the telecom, media, and technology bubble; there’s been a lot of consolidation in that sector. They’ve really been companies that have rationalized their businesses, have delivered very strong earnings, and have not gotten a lot of credit for it. So, these are companies sitting with a lot of cash on their balance sheets.
But importantly, the reason we like technology is not only the strength of these companies and their ability to invest and grow their businesses globally, but also because technology spends from the rest of corporate, in varying sectors—technology investment has been really below trend since before the year 2000, when companies were forced to spend a lot of money to get over the Y2K issue.
Obviously, the subsequent recessions we’ve gone through since then have not been conducive to companies making a lot of capital expenditures in that area. Consequently, as we look at companies today with a lot of cash on their balance sheets, but a lot of uncertainty in the macro environment, technology is actually a very interesting place for companies to make capital investments today, because technology investments tend to be productivity enhancing and not capacity enhancing.
A company can make an investment over a year or two years that can help drive productivity and earnings growth, without having to commit to taking on the same kind of cost as hiring new employees or building new capacity would cause them to do in an uncertain environment, which they seem unwilling to do.
So, we like technology from both of those perspectives. One, because we’ve already started to see some of that capital spending for productivity growth come through from companies across many industries, and also because many of these technology companies have used the cash on their balance sheets to really make themselves global companies.
So, we like in particular enterprise software companies, like Oracle (ORCL) and SAP (SAP) are two great examples of very strong companies that have great global businesses that are participating in that kind of software, productivity-enhancing investment across the world. And most importantly, are trading at a significant discounts to what we think they can grow their businesses over the next three to five years.
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Kate Stalter: Now, is Microsoft (MSFT) another of your holdings, Lisa?
Lisa Myers: It is indeed. Microsoft is a company trading at nine times next year’s earnings. It’s a company that’s involved in the software space. As you know, it’s loaded into 90% plus of all PCs that enter the marketplace.
It’s a company that has a server business. It’s a company with its Xbox Kinect. I don’t know, there was a recent article discussing the potential of Kinect even in the industrial world.
But at nine times next year’s earnings, with tens of billions of dollars on its balance sheet, with a very global business, returning cash to shareholders in the form of an increasing dividend, as well as a very high free cash flow yield, and buying back stocks. It’s just a stock that really is trading on valuation that suggests that it has no growth, and we think it certainly has growth going into the future.
Kate Stalter: I noticed another holding in the fund is Asia-based insurer AIA (AAIGF). The financial sector has really been under pressure in Europe and the US. Is the same also true for Asian financials?
Lisa Myers: Yeah, Asian financials have been under significant pressure over this last little while. I think the market has been relatively indiscriminate about being negative on financials.
However, AIA sort of represents two themes within the portfolios and our view on financials. One is, we’ve been very constructive on the insurance companies, because insurers have traded at an equal discount in terms of valuation to the banking sector.
There’s not nearly as much regulatory risk or as much sovereign debt exposure that would suggest that they deserve that kind of valuation discount, based on the uncertainty in the regulatory environment, as well as the future of returns that banks across the world will be able to deliver. So, insurance companies have been interesting to us in that regard.
Asian financials have also been interesting to us, because I like to say we’re very comfortable investing in underleveraged financials, in underleveraged regions of the world, serving underleveraged consumers.
So, quite the antithesis of the problems in many of the developed markets. What we see out in Asia is a growing consumer base with rising income levels that are starting to look for increasing amounts of financial services. As you know, many of the countries out there enjoy capital surpluses on their balance sheets, and also consumer themselves are not in debt as they are in many of the developed markets.
So, we’ve tended to see, and many of these financials are also overcapitalized themselves as opposed to being undercapitalized, as we see in many of the levels of undercapitalization in some of the European financials. So, very different profiles, yet really have not been left out of this malaise, this financial malaise, so we think there’s a lot of value there.
Kate Stalter: Great information. Thank you. Let me throw a little bit of an oddball question at you, Lisa, but it is something that I personally have heard a number of retail investors wondering about: That’s the fiscal year-end from mutual funds. A lot of folks wonder whether or not that coincides with some major buying or selling that they might see on the major indices.
Lisa Myers: For us, Kate, the fiscal year-end of the mutual fund is really not a date that we look toward in terms of trading. We are very disciplined value investors, and we buy stocks in an open-end mutual fund when there is cash to be invested, or we buy bonds likewise, depending on what the allocation is at the time. We invest accordingly to those cash inflows and outflows, really not to a fiscal year end.
Likewise, we are also buying and selling stocks. When we see good value, we’re buying stocks, and when we see positions in our portfolios that have reached full value, we are selling stocks, or bonds, as the case may be. So, really it’s not a meaningful date for us in terms of buying or selling or moving the portfolio significantly around that time period.
Kate Stalter: Great. Thanks for clearing that up. A final question for you today, Lisa: Any words of wisdom for retail investors, who are understandably pretty frustrated trying to navigate these very challenging markets? What would you say to them?
Lisa Myers: I would say to them that amidst a lot of the macro concerns that are out there today...I mentioned corporate cash a while ago when we were talking about technology companies.
But again, I mentioned that it’s also a phenomenon across many industries, where companies are sitting on a great deal of cash. They’ve been disciplined. They’ve cut back on capital expenditures broadly. They have been able to maintain margins by continuously cutting costs, and there are a lot of great global companies today that are trading at very low valuations.
So, as an investor, we’re pretty excited about buying companies that are participating in growth around the world, which may be more robust today in some of the emerging markets than it is in the developed markets that are mired in some of these macro issues. But these are companies, brands, products, and services that are very viable, and will last well beyond the macro concerns that we have today.
Many of these companies are trading at very high free cashflow yields, very low valuation. They are buying back shares, paying dividends to shareholders, and we would encourage investors to take solace in the fact that they can participate in mutual funds that are owning those kinds of companies. Those companies should deliver value and should deliver returns longer term.
So, I say, stand tough and feel good about your investments, and hang in there.
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