Fund in Focus: AXP Threadneedle Global Equity

Dominic Rossi, lead manager since October 2003S&P Rank: 3 StarsNew Management Is Making Strides

The AXP Threadneedle Global Equity fund (IGLGX) does not have a good long-term track record. But its performance has perked up since a new team of stock pickers came on board about two years ago.

For the five years ended in May, the $494-million fund lost 5.9%, versus a loss of 1.2% for the average global equity funds. Over the ten-year period, it gained 3.6%, on average, less than half of its peers' 7.7% average return.

More recently, AXP Threadneedle Global was up 15.2% for the year ended last month, versus 10.5% for similar funds. This year through May, AXP Threadneedle edged down 0.4% as other funds in its category dipped 1.8%.

"I think it suffered from a series of management changes," Dominic Rossi said of the fund, which he joined as lead portfolio manager in October 2003. Rossi is head of international and global equities for Threadneedle Asset Management Holdings, which American Express (AXP) acquired a month earlier that year. The London-based firm oversees all of American Express's global and international mutual funds.

Threadneedle's investment process combines macroeconomic analysis with research on industrial sectors and individual companies throughout the world. In terms of style, Threadneedle "refuses to be pigeonholed in either a value or a growth box," Rossi said.

Within a sector, the team scans for companies that are producing better earnings and returns on capital than their competitors, but whose stocks trade at a discount to them. AXP Threadneedle Global buys mostly large-cap stocks, but it will invest in smaller ones at times. The fund typically holds 90-115 stocks.

The fund currently has 42% of its assets in U.S. stocks, including its its top holding, Citigroup Inc. (C). Shares of the financial services giant have been beaten down over the last couple of years, partly because of legal and ethical problems. But Rossi says the stock's low valuation relative to Citigroup's rivals strikes him as "unrealistic, given the company's franchise."

Because it has operations around the world, Citigroup has greater ability to grow than many of its competitors, Rossi said. On top of that, it consistently churns out returns on equity of about 19%, he said.

An American company the fund has been adding to its position in this year is home improvement retailer Home Depot (HD), another of its top ten stocks. Rossi thinks the stock is attractively valued and also sees no reason why the store chain can't "continue to gain market share over the course of the next ten years."

Outside North America, a company that has been in the portfolio nearly as long as Threadneedle has overseen it is New World Development Co. Ltd., a property developer in Hong Kong. Rossi likes the company because its shares are selling at a "very significant" discount compared to its overall worth, which is increasing. In addition, he believes New World will continue to benefit from the real estate market in Hong Kong, which he said has been strengthening since the start of last year.

Elsewhere in Asia, the fund's heaviest country stake is in Japan, which accounts for nearly 18% of its investments. "It's a controversial call, I know, because the Japanese market hasn't performed well for at least nine months," Rossi said.

Rossi said that although the country's economic activity has been lackluster of late, he's been drawn to companies in Japan because they've been helping themselves by cutting costs and unloading losing businesses to boost profits and returns on capital. At the same time, Japanese companies have been increasing dividends and share buybacks, he said.

Companies in continental Europe make up another 18% of the fund's investments, the same percentage held in the fund's benchmark, the MSCI All Country World Free Index. Rossi is not high on stocks in that part of the globe because he says the macroeconomic environment there "doesn't look particularly promising."

France and the Netherlands unsettled politics and the economy in the European Union in the last few weeks when they voted down its proposed constitution. Rossi does not see a swift solution to the political problem.

Still, Rossi said he would not cut the fund's holdings in Europe below its bogey because the health of a "significant" number of companies there is tied to exports outside the continent, and they are thus benefiting from recent weakness in the euro.

When it comes to selling, the fund's managers will reduce or eliminate a position if a company's financial fundamentals erode, or its stock becomes too expensive. The last reason is what lead them to decrease their investments this year in a pair of Bermuda-based reinsurance companies, Renaissance Re Holdings and PartnerRe, Rossi said.

In making a case for Americans owning foreign companies, Rossi argued that they are currently offering better returns on capital than their domestic counterparts. In addition, he said, foreign equities make up 50% of the world's stock market capitalization, "so if you invest outside the United States, you've doubled your chances of getting rich."

Contact Bob Keane with questions or comments at: .

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