Robert Scharar and Wes Yuhnke of Commonwealth New

S&P Rank: 5 StarsSept. 18, 2003The Ups

Quick Take: If you're going to own only one fund that invests overseas, then the Commonwealth:New Zealand Fund (CNZLX) shouldn't be it, says Robert Scharar, who has managed the portfolio since its inception in 1991.

Because its investments are limited to companies that are based or do at least half their business in Australia or New Zealand, the fund doesn't provide adequate international diversification, Scharar concedes. However, he says, investors would find it a "nice addition" to a portfolio of other international stocks or funds because it can supplement those holdings.

Although it has trailed similar funds recently, the $35-million fund has consistently topped them over the long run. Commonwealth New Zealand gained 16.4% this year through August, versus 19.6% for other funds that invest in individual developed countries. For the five-year period ended last month, the fund rose an average annualized 13.8%, versus 1% for its peers. For the ten-year period it rose 3.3%, while its peers slipped 0.04%.

Scharar and Wes Yuhnke, who joined the fund as its co-manager a year ago, look for small and mid-sized companies with growing earnings and high dividend yields that they think can be sustained. They like to buy stocks at attractive valuations. In addition, the fund usually keeps 10%-15% of its assets in fixed-income securities.

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Mutual funds that invest in individual countries can add diversity to portfolios, even those that have exposure to large foreign companies, whose stocks often move in the same direction as the U.S. market, says Robert Scharar.

An advantage of the Commonwealth New Zealand fund that he runs is that, unlike similar offerings that focus on small or developing markets, the companies it buys offer transparent bookkeeping and reliable corporate governance, Scharar says.

"These are pretty good economies, and pretty good places to be" for investors, Scharar says of New Zealand and Australia, the countries the fund restricts itself to.

Both are democratic, "old line, English law-based" nations, he notes. They also have natural resources, like precious metals and timber, that are in demand abroad, as well as solid tourism industries and reasonably strong currencies. In addition, both are home to many small and mid-sized companies (which the fund focuses on) whose businesses and stock price movements are tied more to local conditions than those in the U.S. or other parts of the world, Scharar says.

Besides stocks, the fund typically keeps about 10%-15% of its assets in fixed-income securities, consisting primarily of short and medium-term corporate bonds, Scharar said. At times when stocks don't seem compelling, or if local money market rates are alluring, Scharar and co-manager Wes Yuhnke may also maintain a cash position of 10%-15%.

In picking the approximately 50 stocks that go into the portfolio, the managers look for companies with what they consider sustainable, above-average profits and dividend yields. They like to find stocks priced low compared to a company's earnings, book value or cash flow.

While the managers primarily focus on the characteristics of individual companies, they try to identify those that may benefit from changes in economic, demographic, political or social trends.

In the last two months months, the managers said they bought a stake in Alumina Ltd ADS (AWC), an Australian aluminum producer. Yuhnke says the company is attractive because of its exports to China, a rapidly growing market.

The No. 1 stock in the fund at the end of June was Williams & Kettle, a New Zealand-based company that provides equipment, supplies, and financial and real estate services to farmers. The investment is a play on agriculture, which accounts for a large part of the country's economic activity, according to Yuhnke. Financially, the stock features a dividend yield of nearly 9% and "very attractive multiples," he says.

The fund's major holdings also included two Australian building materials manufacturers, James Hardie Industries, and Rinker Group Ltd.

Hardie makes fiber-reinforced cement pipes, siding and roofing shingles. It's stock sports a premium price-to-earnings ratio of 22, based on trailing 12-month earnings, but Yuhnke thinks the valuation is justified because Hardie has "demonstrated growth in the past, and we think it will continue to deliver," he says.

Rinker, also a cement maker, does a lot of business in Florida and Texas, so it stands to gain from the expansion of the housing markets in both states, Yuhnke says.

Though the managers say they try not to trade often, they will trim a holding or sell it outright if a company's financial fundamentals deteriorate, or if the stock becomes pricey. The fund's turnover rate was 28% in its last two fiscal years; for the six months ended in April the rate declined to 12%, Scharar says.

"With some of these stocks, you just have to be patient and you will get your reward," he says.

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