From the September 2008 issue of Boomer Market Advisor • Subscribe!

Don't go overboard in overseas investing

Chris Brown of Pax World Balanced Fund finds success with a measured approach to domestic and overseas investing. Far from chasing returns across the globe, it's, well ... balanced. You and your clients would do well to take a similar approach.

The picturesque New England seaside town of Portsmouth, N.H. isn't exactly a hub of financial industry activity, and that suits Chris Brown just fine. About an hour north of Boston, it's a part of only 18 miles of Atlantic coastline claimed by the state.

"Boston is the money hub for mutual funds," says Brown, manager of Pax World Balanced Fund. "What's nice about our location is that we get a substantial amount of management coming through the city. We spend a lot of time down there visiting with company managers and having access to them. So, it's been very good from that aspect."

Access to world-class company managers and research without the traffic and headaches - not bad. And with a weak dollar and struggling domestic economy, his ocean view is a constant reminder of the opportunities just beyond the horizon for interested overseas investors - making Brown the perfect cover subject for this year's mutual fund issue.

The excitement generated by foreign markets isn't new (witness the run in emerging markets, at least until a few months ago), but what sets Brown apart is his refusal to go overboard - forgive the pun - by chasing performance around the globe. A healthy foreign allocation is just fine, but there are plenty of gems to still be found here at home; ones he doesn't ignore. It is a balanced fund, after all, but this balance comes not just from stocks versus bonds, but also from the ratio of domestic to foreign investments.

"I've been managing the fund for 10 years now and when I first started, the maximum we could have in foreign investments was 10 percent," Brown explains. "We increased that to 25 percent a few years ago because it was one of my big initiatives to put more foreign in the fund. Now we've had another shareholder vote, and we can actually go to 45 percent if we feel it's right."

As if staying abreast of stocks versus bonds and foreign versus domestic wasn't enough, Pax has added another factor to the mix.

"We're involved in sustainable investing; it's a large part of the process. We incorporate ESG into the investment process. This stands for environmental, social and governance criteria. We believe it gives us a better outlook on companies and much more information than typical portfolio managers and analysts see."

Call it SRI on steroids. Once companies have passed the ESG criteria, Brown says he's top down in his approach. He looks at macro issues such as interest rates and equity valuations here at home and throughout the world. The stock selection is theme-driven and sector-oriented. He focuses on themes and sectors he believes will outpace the overall rate of GDP growth of the economy.

"You could describe our equity analysis as sustainable growth at a reasonable price. Our equity component is primarily large-cap growth companies that are typically industry leaders, but we're also a go-anywhere type fund in that we'll cross other market cap spectrums. The bond side of the portfolio is extremely important to us. We view the bond component as more of a buffer that also generates current income for our shareholders. We don't make interest rate bets with the bond component. They are very high quality. Our average credit rating is double A +. Our duration is about 2.3 years, which is very low."

It's hard enough to find good deals as it is, but with an ESG requirement, it's even tougher. Pax employs a separate ESG research team that's on the same floor as portfolio management.

"They actually do all the analysis. We have them involved in the portfolio management meetings, so it's really incorporated in the due diligence process from the beginning."

After years of outperformance by small-cap sectors, large cap growth finally made its return just as the economy hit the skids. But it isn't discouraging Brown, who still finds good deals in the space.

"Technology has been tough, but one of our largest holdings is Cisco Systems. What's interesting about Cisco is that they're a domestic company with foreign sales exposure. This is a theme with a number of companies in different sectors. Investing abroad is good, but you also can buy domestic companies here that have foreign sales exposure, and you can get traction from that. Cisco fits the bill in that respect, since 45 percent of their revenues are derived from abroad."

Is he a Google fan?

"I've been in and out of Google. I don't hold it currently. At the right price, yes, but we're not quite there yet. But I've owned it on and off over the years."

Other sectors he's holding domestically include agriculture. John Deere is one of his largest holdings, which is a great play in agriculture, he says. Heavy equipment is one of the last industries that the U.S. seems to dominate.

"They're not just selling here; 35 percent of their sales are overseas. Again, this fits the bill of high quality, domestic large-cap company that has decent foreign sales exposure."

Energy, according to Brown, is a different story. With his strict ESG criteria, it's proved challenging to find companies in which to invest. For instance, he points to Baker Hughes as one of his top holdings, even though they sell drill bits and pumps to offshore and onshore drilling companies. At first glance, not exactly an ESG type of company. But because they're responsible in how they manage their business, both from an environmental and social standpoint, it's met his criteria.

Internationally, agriculture is again a favorite, and Brown points to another company that wouldn't initially appear to pass his ESG screens.

passes our screens. It's certainly one company I would highlight. We're very excited about it and adding it to the portfolio. And they're very global; they've got sales all over the place."

Telecommunications and infrastructure round out his international equity favorites. America Mobile is one of Latin America's largest wireless companies and ICA Impresas is a Mexican infrastructure company, one of the largest in that country. Anytime a road or bridge has to be built, chances are this company's involved with it, Brown says.

On the bond front, curves are steepening. Treasuries are overvalued, and he doesn't see much value there for diversification, but he does continue to hold some. But Brown believes Fannie Mae and Freddie Mac's recent volatility translates to real opportunity for investors, and he has a significant part of his portfolio in government agency bonds. He thinks bond holders are well protected; however, if he was an equity holder he'd be worried.

"In corporates, I think there have been a couple out-of-favor industries. Managed care in particular has really taken quite a few hits. But on the bond side there's been some widening with the managed care companies, so we're actively looking at corporates in that area. Internationally, we hold Telefonos de Mexico bonds. These are denominated in pesos so it's a nice play on some of the currencies down there. If they're appreciating against the dollar, you get a competitive interest rate as well as a little upside on currency."

So long term, on both the bond and the equity side, what does he see on the horizon? What is he taking a hard look at?

"People often ask, 'How do you outperform?' A lot of times it's what you don't own, believe it or not. In this respect, we've been significantly underweight in financials. That's the epicenter of everything that's gone wrong with the housing market. We're not buying the mortgage companies, but we're buying companies like Goldman Sachs and State Street Bank; companies that have been punished along with the rest but haven't had that subprime exposure. I think those are good examples of companies that feel the ripple effect, but they've done very well to manage themselves through this."

And so, apparently, has Brown. When asked about inflows versus redemptions, Pax World Balanced Fund is holding the line; further testament that shareholders understand and appreciate his strategy.

"We're tracking about net $46 million this year. Last year we had a total net of about $78 million. Yeah, we're holding up quite well. We're very happy with our inflows."

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