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A Top-Performing Europe Fund? It’s True!
03/19/2012 6:30 am EST
Franklin Templeton’s Mutual Series of funds seek value while aiming to reduce risk. Katrina Dudley of the Mutual European Fund, which has a four-star Morningstar rating, explains how her fund zeroes in on investments.
Katrina, I wanted to start out by asking you to say a little bit about an interesting blog post you recently wrote, essentially saying that investors who are avoiding any exposure to Europe are potentially overlooking some opportunities right now.
Katrina Dudley: Yes, Kate, and thank you very much for having me. I think that what we’re seeing is a lot of investors basically looking at the austerity measures, and all the negative headlines about Europe and what’s going on, and just throwing it away to the side—it’s too complicated.
And we believe that there are a lot of opportunities to own companies that are headquartered in Europe, but actually have very, very strong global franchises. And those franchises operate not just in Europe, but in the United States and in Japan and in Asia. We think that investors who are disregarding Europe are disregarding the opportunity to pick up these franchises at very attractive valuations.
Kate Stalter: That leads us to your fund and what your investment philosophy and your objectives are. Tell us a little about that.
Katrina Dudley: At Mutual Series, we are a quintessential deep-value investor, and we’ve been doing this for the last 60 years.
We have a portfolio that is built on a stock-by-stock basis. It’s approximately 70 names, and each of the companies in our portfolio was owned for a very specific reason.
We don’t go out and look and say that we would like to be overweight the auto sector, and then look to buy automotive companies. We will look at an automotive company and if it meets our valuation criteria, we will pick up the stock. We are very patient. We’re very selective, and we also spend a lot of time doing our homework.
Kate Stalter: You had a few stocks that you were able to tell us about today. Why don’t you name some of those, and why you like them, and why they fit it to this philosophy?
Katrina Dudley: Well, let me give you an example of a company where we think investors are ignoring it, because it has exposure to what people expect to be French austerity measures. The company is Vinci (Euronext: DG), which is a construction and concession operator that is headquartered in France, but has construction operations all throughout Europe and the Middle East.
This is a company where 50% of its EPS is generated from the concession franchise, and the balance is generated from the engineering business. The stock has a very attractive dividend yield, at 4.5%, and that dividend is backed by that concession franchise.
I look at Vinci as a bond, but better. Twice a year, you receive a dividend that is equal to 50% of their earnings…but unlike a bond, that dividend will go up over time as the company’s earnings improve.
And at the end of the day, you have a stock that should appreciate, because the company continues to invest its earnings, and those earnings will continue to generate value for shareholders. With a bond, at the end of the day, you usually just get back par.
Kate Stalter: Tell us about some of the other names that you’re holding right now.
Katrina Dudley: Let me give you an example of another name. I spoke about our investment philosophy, and Vinci is an example of a company that trades at a discount. In terms of its multiple, it trades at approximately 11 times earnings.
We have another company, though, which doesn’t on the face of it look like a cheap stock. It trades at 22 times earnings, and has a small dividend yield, but it is an example of where we will look at stocks that trade at significant discounts to their intrinsic value, on an asset basis.
The company I’m talking about is actually A.P. Moller Maersk (Copenhagen: MAERSKB), which is the global shipping and oil and gas company. We look at the sum of the parts, which are the port franchise, the oil and gas company, and the shipping business. And we see substantial upside.
In the past few years, they’ve appointed a new CEO, who was actually an outsider to the company. He was the former CEO of Carlsberg (Copenhagen: CARLB). We have historically been investors in Carlsberg, and had seen what he had done there to optimize the operations and to maximize value, and we expect that while he’s at A.P. Moller, he will do a similar type of restructuring and turnaround.
The shares are volatile. They tend to trade on news regarding any shipping rate. But that said, we believe the market really ignores the underlying value of their oil and gas business and their port franchise.
Kate Stalter: Any other sectors or names, or any economic developments driving interest in a particular stock for you at this time?
Katrina Dudley: We have an interest in a packaging company called Rexam (London: REX). It’s a global beverage-can play, and we originally invested because the new CEO was very focused on what he called the three Cs, which are cash, cost, and return on capital employed. At Mutual Series, those three words were music to our ears.
The stock trades at a very small multiple of 11 times forward earnings, and that’s a discount to its global peers. It also has a strong dividend yield, and it has a management team that is very focused on portfolio optimization.
They also recognize that some of the assets in their current portfolio, they may not be the best earners of those assets, and they are looking to divest them and then take the sale proceeds and return them back to the shareholders.
The other thing we like is that they’re investing for growth. They’re the largest beverage-can manufacturer in Brazil.
Finally, the beverage-can market in Europe is actually a growth market. So, this is a company that actually isn’t exposed to the global austerity measures. People will continue to drink beer and soft drinks, and in Europe, the can penetration is very low versus other markets. So, as that penetration rate increases, you’ll see growth in Rexam’s earnings.
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