Quick Take: The T Rowe Price International Discovery Fund (PRIDX) recently opened to new investors following a three-year hiatus. The portfolio had to be closed in March, 2000, after its asset base grew to an unwieldy $1.4 billion following an outsized 155% gain the prior year
Based in London, portfolio manager Justin Thomson searches the globe for high-growth, small-cap stocks that can deliver sustainable profits. Unlike many foreign stock managers, he will not hesitate to invest in the emerging markets, although the bulk of his assets remain parked in Western Europe and Japan.
For the five years ended in May, the fund rose an average annualized 6.9%, versus a loss of 4.1% for the average international stock fund. Year to date, as of the end of May, it has risen 16.6%, versus 6.8% for the peer group. Thomson took over the fund in August, 1998.
The Full Interview:
S&P: The fund was recently reopened to new investors on March 31 after having been closed for three years. Could you discuss this?
THOMSON: We closed the fund to new investors in March, 2000, because net assets had ballooned up to about $1.4 billion. In the first quarter of that year alone, the fund took in $450 million of new cash. It proved difficult to get all that cash invested, and to maintain our small-cap mandate. This coincided with the stock market bubble, when the market had got far too overheated.
Fast forward three years, and market conditions have dramatically changed: depressed valuations and poor business outlooks. Our fund had suffered some cash outflows. It currently has net assets of about $425 million.
S&P: What kind of stocks do you look for, and how do you go about selecting them?
THOMSON: We invest in fast-growing, small-cap companies among both developed and emerging countries. We will consider companies ranging in market-cap size from $100 million to $3 billion. Our median market cap typically falls between $550 million and $600 million.
We clearly have a growth bias. We focus on profitable companies that can sustain their profitability. We do our own fundamental research, and conduct interviews with company managements. Regarding valuation, we seek to take advantage of market pricing inefficiencies.
S&P: Is your investment process strictly bottom-up?
THOMSON: Yes. For example, we currently have about 28% of our assets invested in Japan and Germany. From a top-down perspective, these are two economies that are struggling, and would not appear to be appealing places to invest.
However, we are aware of certain macroeconomic trends that may influence our investment choices. For instance, in Japan, we are emphasizing companies serving the domestic sector, rather than exporters, reflecting our view of the relationship between the yen and U.S. dollar.
S&P: The fund gained 155% in calendar 1999, then had three straight years of declines. What drove the outstanding gains in 1999? Were you heavily invested in technology and telecom then?
THOMSON: Our performance was, indeed, driven primarily by technology and Internet stocks. With respect to the Internet, we typically stayed away from the “pure plays.” Instead, we invested in companies related to software services, infrastructure, and firms that stood to benefit from doing their business over the web.
Our telecom exposure was principally focused on mobile telephony. There weren’t all that many telecom equities available in the small-cap space.
Our big run was also influenced by our holdings in Japan. In November, 1998, we doubled our weighting there. We caught it right as the government was pumping money into start-up companies. It was a great environment for Japanese small-caps.
We sold off many of our tech holdings throughout 2000 and 2001, and we have struggled the past three calendar years.
S&P: How many stocks do you typically keep in the portfolio?
THOMSON: Usually between 125 and 175. We currently have about 150 now.