Greencore (GNCGY), a sandwich and convenience foods manufacturer operating in Ireland and the United...
A Giant Opportunity
01/07/2010 9:06 am EST
Lisa Myers, manager of the Templeton Income Fund, likes rich multinationals with the wherewithal to grow in emerging markets.
Q. What's your broad outlook for the markets in the year ahead?
A. Corporations have been very aggressive about cutting costs. Any recovery that they've seen has been very productive for earnings. There are a lot of great global companies, with great global brands and great global businesses that were trading at exceedingly low valuations [during the crisis.] Many of these companies had used strong cash flow over the last several years to grow their businesses in Asia and other emerging markets, where growth expectations are better than in developed markets. Certain areas look expensive, but overall there is still fairly decent value in the market.
Q. Where are you seeing more value now? I've noticed several big European multinationals among your top holdings.
A. Dividend yields in Europe are higher than they are in the US, and that's not new. We're not looking to Europe, but yes, we're finding value in large companies. They happen to be domiciled in Europe and to be paying big dividend yields, but many of them are global companies.
Q. What sectors still look attractive after the big runup in 2009?
A. We like information technology. Consumer discretionary is clearly among the larger weightings in the fund. Industrials: Siemens (NYSE: SI, Frankfurt: SIE) is in the top ten; we've recently put on a position in MAN Group (Frankfurt: EDF2). All of these companies have great potential not only because of their exposure to emerging markets but restructuring potential and cyclical potential as the economy recovers. They generate strong cash flow and are fixing asset allocation to return more capital to shareholders. We have significant dividend yields from these companies today that we anticipate will continue to rise.
Q. Has your fund's asset allocation in terms of equity versus debt changed over the course of the year?
A. Yes, and that's a very important part of the fund's dynamic. We're at 55/45 equity/fixed income right now. We were as high as 65/35 [overweight toward debt] when the markets were really dreadful in 2008 in an effort to preserve capital, and we've continued to shift back toward equities over the course of the recovery. The fixed income market has clearly moved much faster, despite the strong run in equities. When you have free cash flow yields that are outstripping bond yields to such a degree—the gap is probably bigger than it's been in several decades—and you know that interest rates around the world are going to move up, all indicators are pointing toward a heavier weighting in equities.
Q. You mentioned Siemens earlier—what makes it so attractive here?
A. We've held the stock for some time, buying into the restructuring of a classic German conglomerate that had been under-managed, with poor asset allocation decisions. Over the past several years, it's had its trials and tribulations with management teams, but we believe the management team in place today is very focused on delivering value to shareholders. They're focusing on areas that are profitable and where they have a comparative advantage. They have a phenomenal power generation business when the world is busy spending money on infrastructure. We know there is a dearth in power generation—and Siemens is one of the three largest producers [of generating equipment] in the world. Certainly its health care business has proven that it's a major player around the world. And these are global businesses, so they're participating in growth in India and China, where they are very focused on infrastructure, so it fits very well in terms of where money is being spent on a macro basis.
Q. Could you talk a little bit about another one of your bigger holdings, Compal Electronics (Taipei: 2324)?
A. Compal is a fantastic Taiwanese company. This fund has been a huge beneficiary of dividend yields in Taiwan—it happens to be a market where companies pay large dividend yields, and we've been very constructive before the election of a new government and the opening up of a relationship with mainland China. We really believed in Taiwan's capital links with China several years ago, and started buying in. Yields are still high despite the fact that Taiwan has had a phenomenal run. The average yield is probably around 5%. Compal not only is a high-yielding stock, but we also like it because it's one of the producers of laptop and PC components. PC demand probably bottomed in the last half of 2008. Laptops and netbooks, which are Compal's forte, are a growing part of the market. So Compal is a beneficiary of the pickup in PC growth as well as the growth in mobile PCs. And if you believe in growth in China, China has 12% PC penetration rate at the moment. It's a good business; they are the low-cost producer. Integration with China means that they can move into China more easily. Compal shares have done well, but we continue to believe there's value there.
Q. Any other areas you're excited about now?
A. Health care has been a tough area to be in: it has underperformed since the markets started to recover in March. However, more recently in this fourth quarter it has started to bounce back. We were even able to buy some biotechnology companies that were trading at very low valuations and aren't subject to the generic competition issues. Roche (Zurich: ROG), which we own, is an example of a great company with a great pipeline. There are still credit issues in the economy—the delevering process is ongoing. So buying into big companies that can continue to invest in their businesses without needing access to the credit markets, and that have used their cash flow to build their businesses in emerging markets is a good idea. It could be a telecom company like Singapore Telecom (Singapore: T48, Sydney: SGT), the incumbent in Singapore that owns a 30% stake in Bharti Airtel (Mumbai: BHARTIARTL) and a 30% share in Telekomsel in Indonesia, two markets where there is sustained growth because of the underpenetration in mobile.
Q. Thank you.
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