Banking on Big Bargains
11/05/2009 3:20 pm EST
Bradley Radin, manager of the Templeton Global Smaller Companies Fund, beat peers by shopping when the world was panicking. He favors banks and consumer names and likes the fundamentals in Asia.
Q. Your fund is in the top 2% of its category year-to-date, according to Morningstar. What accounts for the outperformance?
A. Why don't we just stop right there? [Chuckles.] We took advantage of really crummy markets a year ago to pick up decent stocks at spectacular prices. I was playing offense during the bear market and trying to get into names that would give me the most torque when the bear market ended and things rebounded… I had some very big sector bets at the bottom: I was at 40% consumer discretionary stocks at the bottom; the [benchmark] index is probably at 10%... The point of maximum pessimism is when you want to be buying stocks, and that's what we did on the way down.
Q. You're still overweight consumer discretionary, is that right?
A. Yes. And I have roughly a 20-25% weighting in financials as well, and a pretty low weighting in some of the more defensive areas… But I'm sounding much more sector-driven than I really am. We really just want to find decent companies selling at super-cheap prices. And typically, in normal times—these are not normal times exactly right now—that generally means a reasonably good company that's having a really bad patch: some short-term problems, a bunch of quarterly misses, a stock that's down 60-70% from the peak. That's the stock that we tend to find attractive. That's really the sweet spot for us: taking advantage of a market dynamic that leads most investors to head for the hills. On average, we hold stocks for about four or five years, so when we buy into a name we're hoping for a double over that period.
Q. Let's take some of your top holdings in Asia, names like Dah Sing Financial (Hong Kong: 0440), Busan Bank (Seoul: 005280), People's Food Holdings (Singapore: P05) and Sinotrans Hong Kong: 0598). Those can't have been distressed, right?
A. They were, a year ago. Dah Sing Financial in Hong Kong is a small bank that traded at HK$70-80 in '07-'08, and got down to a low of about $HK15 in early '09, trading ridiculously cheap at about half the book value. Investors were truly panicky about all things financial so they were selling out of this company massively. They did have some exposure to things that blew up, but the amount of money was quite modest. It was just enough to get in the headlines and make them dirt cheap. But then there was the sense that, wait a second, what happens to all the businesses in Hong Kong building factories in China that they've financed? When the world grinds to a halt aren't these companies going to default? So there was this knock-on effect. As we roll forward, it turn out that this exposure to the junky parts of structured credit that blew up was really quite modest; this credit cycle of Hong Kong companies really didn't amount to much; in fact they're writing back some of those loan loss provisions because it was such a short-duration problem. All the small and medium enterprises that they financed, their order books dried up for a quarter and they're bouncing back now and doing fine.
And Dah Sing has rallied, but hey, it' still just at 1.1 times book value.
Q. Where are you finding the biggest bargains now? Is there a particular theme evident?
A. There are some interesting industrials that haven't moved yet that should benefit as global economy recovery builds steam. I've been surprised at how far and how fast everything else has moved off the bottom. We're potentially going through a transition the next few months in the portfolio where some of the names that have moved a lot will be replaced with other bargains. And it's early days in terms of that.
Q. Is there a region that you find especially attractive?
A. I've generally had more luck in Asia; that region has been a good source of good companies with good growth selling at cheap prices with good balance sheets. A lot of the European balance sheets tend to be a lot worse. And my US weighting has increased a fair bit over the last two years.
Q. A lot of these markets aren't necessarily that cheap anymore, at price-earnings ratios of 15-16 and over 20 for China.
A. A lot of the broad-market statistics are broadly influenced by the large caps. And the earnings that we're looking at are not current year or next year—they're earnings five years down the road. I agree that a lot of the broad market stats are starting to look fair or a little bit more than fairly priced, but at the individual stock level there is still room to find good ideas at cheap prices.
Q. Could you talk a bit about another of your top picks, Pacific Brands (Sydney: PBG)?
A. They're an Australian retailer that tends to focus on basic clothing—about 30% of their sales is underwear and socks. They also sell outerwear, bedding and shoes. This stock went from A$3.30 to a low of 13 cents in March '09. They did a big acquisition in early '07 and took on too much debt. In retrospect, it was a dumb acquisition at a dumb time, and they paid for it in a dumb way. And late last year the market was not very forgiving toward these [overleveraged] mistakes. It just got crushed as a result. But the underlying business was and remains pretty good.
Q. Thank you.