From the September 2008 issue of Investment Advisor • Subscribe!

September 1, 2008

Still at the Top

Jim Moffett has quietly led his UMB Scout International Fund to the heights and kept it there

Jim Moffett, lead manager of the UMB Scout International Fund, was as new to international equity markets as the firm was when it launched the fund 15 years ago. Today, he manages an impressive $4.1 billion in international assets, through the fund, an ADR product and in separately managed accounts. UMB has also just launched the Scout International Discovery Fund, a product designed to take advantage of small- and mid-cap stocks in international markets.

In a tough global economic and financial climate--one tainted by wide credit spreads, the ongoing legacy of the subprime crisis, and a sharp fall in the housing sectors of key markets like the United Kingdom and Spain--Moffett's conservative, sure-but-steady approach to international equity markets has allowed the Scout International Fund to continue steering the course. This approach is grounded in the idea of buying for the long term by focusing on quality, value, and growth, and it's a strategy that Moffett believes is best suited for anyone looking to get the most out of international equity without taking too great a risk.

"To use a football analogy, the fund is basically about blocking and tackling. No fancy quarterbacking, no razzle-dazzle. Just basic blocking and tackling," Moffett says. "Many people in this business take too much risk for higher returns. We have always followed a lower-risk strategy that has worked out well for us."

The Scout International Fund is heavily weighted in strong industries like energy, materials, and consumer staples--industries that have reflected well the ongoing themes and trends in the global economy. However, successful investing is not only about picking good industries or individual stocks: Moffett and his team also place great importance on cutting back or avoiding altogether troublesome sectors. This year, for instance, the team significantly reduced the fund's exposure to the financial services industry.

In late July, we spoke to Moffett about the Scout International Fund and UMB's newly minted Discovery Fund (see sidebar, The New Sibling).

Jim, your fund expenses are low, your turnover is low, and you have succeeded over the years in attracting $4.1 billion to the Scout International Fund. What's the secret?

Well, the fees are just a part of the equation, but that isn't the big reason for our success. We have earned big returns by being long-term investors. When we buy a stock, we live with it, so to speak. There is a difference to buying a stock versus renting it.

How do you choose stocks for the portfolio?

Ours is a multi-pronged strategy that looks at countries and sectors: countries on one grid, sectors on the other. Where the two of them meet is where we buy. We try to look at what a country does best and create a balance, and running through that, there are some investment themes. We start with the qualitative analysis and in terms of the quantitative side, our primary valuation tool is price-to-EBITDA. That cuts through some of the accounting conventions, and then we look at estimate change models. We like to own stocks where earnings are going up, but when a company bubbles to the top, we look at it and say 'How can we make it fit into the portfolio so that we are comfortable with it?'

How long do you hold stocks?

We run about a 20% turnover, which is a five-year time horizon.

Your fund focuses on the large-cap stocks of mostly developed international markets. Is this because that's pretty much what was available when you started out?

It was some of that, yes. But we also started conservatively in the business, using only ADRs initially, and we still have a substantial portion of these in our portfolio. We have added countries and names one by one, and starting from the large caps, have evolved down the size spectrum to invest in small- and mid-cap stocks in the new Discovery fund.

Overall, the international fund is designed to be a core international product and the value is in larger stocks. In the core product, we do have 15% allocated to emerging markets, and we think this is the right mix for a one-fund product. If you're a fancier asset allocator running billions of dollars, you might slice your international investments thinner, not just into emerging markets but also into, say, a Chinese fund or an India fund. But as a one-product shop, we think that what we have is well tailored to investors' needs.

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How do you choose which countries to overweight or underweight in the portfolio?

We don't really make big country bets but I'd say that the biggest bet has been on Brazil. This is kind of a deviation to the norm since our biggest country positions are in the United Kingdom and Japan, which are also the biggest markets, but Brazil has been the biggest overweight for us as a country. They are prime beneficiaries of the growth in China. China imports most of what Brazil makes, from airplanes to iron ore, soybeans, paper, etc. So Brazil is really humming.

That leads into a question on the high raw material/commodity prices and high oil prices that we have seen this year, both of which have benefited the economies of several countries across the globe. How do these macro factors play into your investment strategy and how do you see them panning out for the rest of the year?

We have been overweight in both raw materials and energy, although not fanatically as our style is not to make big bets. We see that on a macro basis, China and India are leading the demand for both materials and energy and we think they will continue to do that. Whether oil is at $122 a barrel or $140, there is still a tight supply/demand dynamic there. The biggest change recently has been the slowdown in demand, but it takes a long time to bring new supply on stream and there is still a lot of demand in the world.

Aside from raw materials, what other industry sectors do you like?

We like the non-pharmaceutical healthcare sector. Diabetes is a theme and we like companies like Fresenius [based in Germany] that are in the dialysis business. Companies that make spare parts and biocare for teeth, artificial hips and knees, as well as hospital supply companies, are all interesting healthcare companies.

We also try to do some indirect investing in things we consider a bit too venturesome for us. There's a company we own called Hellenic Bottling, for instance, which is the second largest bottler in the world, that's operating in Eastern Europe. We like a couple of Austrian companies in the same way, like OMV, an Austrian oil company that has operations in Central Europe, or Erste Bank that operates in Hungary. Rather than buying a Hungarian bank, we prefer to buy a Viennese bank.

Which companies/names have worked out best for you?

Petrobras in Brazil and Potash in Canada. Again, in the non-pharma area, we've liked CSL (Commonwealth Serum Lab), an Australian company that makes blood plasma derivatives.

Is there any industry sector that's disappointed you this year and why?

Well, the whole financial sector has been a disappointment [laughs]. In terms of specific stocks, we sold UBS and several other banks that disappointed us like RBS [Royal Bank of Scotland] after its acquisition of ABN AMRO. Those are the two biggest disappointments we have had. One that has been a disappointment but that we still think is attractive is Anglo Irish Bank. As far as we can tell, they have a sound credit culture and they don't seem to have bought any of this silly structured credit stuff--toxic paper, I call it.

I have heard that Spanish banks are in good shape on that front as well...

Yes, in fact I met with BBVA [the Spanish banking group] just recently. They do things differently over there where for some kind of structured bond products, say, the bank would wind up keeping the first 10% of the risk. It's a different way of doing things.

Do you have a sell discipline?

Our basic philosophy is to ride your winners and cut your losers, so that when something goes wrong, you say 'Oops, I made a mistake.' This is where we were with UBS and RBS. Or, something might go wrong politically in a country, and this is what happened when we owned some Argentine stocks. But we also cut stocks for portfolio reasons, which means that when something does too well, so to speak, and it gets to be too big a position in the portfolio, we will cut it back so that it isn't an untoward size. It isn't so glamorous but it's part of the reason why we are successful.

Back in the early part of the decade, during the tech bubble, we liked tech stocks as much as anyone else, but they had gotten too big for the portfolio. We still loved them, like everyone else, but we cut them for portfolio reasons and it saved us a lot of grief. We have done that now in the energy area; Petrobras has done very well for us, but though we haven't cut it out totally, we have cut it down a bit.

Do you feel that U.S. investors are more interested in international markets now than they were when you started managing the fund?

When I started in this business, it was hard to get someone to put even 5% of their portfolio in international investments.

Now, people are more comfortable with higher exposures to international markets, but there are still a lot of skeptics out there. What bothers me is that a lot of people are trend followers and since international investing has been doing so well, they want to just get onto the bandwagon rather than looking at international in terms of adding balance and giving overall diversification to a portfolio.

Do you have any mentors?

I have been in the business so long that there are a lot of names I could cite, but I never started off as a disciple, so to speak. Some people started following Ben Graham, but my philosophy has just evolved over time.

Finally, do you own the international fund?

I have a substantial portion in my 401(k), yes.


Savita Iyer-Ahrestani is a freelance business journalist who is currenly based in Arnhem, The Netherlands. She can be reached at siyerwriter@yahoo.com.

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