Quick Take: The Polaris Global Value Fund (PGVFX) seeks out stocks around the world, regardless of region, industry or market-cap size, which are underpriced and can provide sustainable cash flow.
For the year ended September 30, the fund has surged 36.7%, besting the 25.7% gain by the average global equity portfolio. For the three-year period, the Polaris fund has risen an average annualized 11.3%, versus a loss of 10.6% for its peers. The fund carries a 5-Star rank from Standard & Poor’s.
Bernard R. Horn, Jr., president and chief portfolio manager of the Boston-based investment advisor, Polaris Capital Management, has run the $26-million portfolio since its inception in June, 1998. However, the portfolio made its first debut in June, 1989, as a private fund.
The Full Interview:
S&P: To what do you attribute the strong performance we’ve seen from global equities and your fund this year?
HORN: I think it’s a combination of good underlying fundamentals, and a growing optimism that global economies will recover, particularly in Asia.
However, the overriding factor for the strong global performance is that valuations are much more compelling outside of the U.S. We continue to believe that foreign equity markets will outperform U.S. markets for the next few years.
For example, in the U.S., the price-to-cash-earnings ratio is over 12; everywhere else, it’s about 8. This means that the U.S. market is currently “priced for perfection” allowing for no mistakes or disappointments in the economy, and we believe this is an overly-optimistic view.
S&P: How many stocks are in the fund?
HORN: Currently it has about 70 stocks. We have increased the number of holdings in the portfolio because we are finding more value stocks, and as global markets recover, we want to participate more broadly in such a rebound, and not miss any of the quickly-advancing sectors.
S&P: What are your largest holdings?
HORN: As of June 30: Pacificare Health Systems, Inc. (PHS), 2.5%; Banknorth Group Inc. (BNK), 2.4%; Sappi Ltd. (SPP), 2.0%; Hawthorne Financial Corp. (HTHR), 2.0%; Sears Roebuck and Co. (S), 2.0%; ASM Pacific Technology, 1.9%; Amkor Technology Inc. (AMKR), 1.9%; Abington Bancorp Inc. (ABBK), 1.9%; Samsung SDI Co. Ltd. 1.9%; and Horizon Bank & Trust Co., 1.9%. These positions represented approximately 20.5% of the fund’s holdings.
S&P: What are your top regional allocations?
HORN: As of June 30: North America, 50.6%; Europe, 23.4%; Asia (excluding Japan), 9.0%; Scandinavia, 8.9%; Africa & South America, 6.2%. We currently have no exposure to Japan.
S&P: What are your top industries?
HORN: As of June 30: consumer discretionary, 24%; financials, 19%; industrials, 14%; materials, 13%; information technology,11%; and health care, 9%.
S&P: What is your view of Western Europe?
HORN: Many European companies are sending manufacturing capacity to low-cost nations like China, India and Eastern Europe. For example, one of our holdings, Continental AG, a German tire and car-parts manufacturer, has relocated some of its manufacturing operations to Romania and other Balkan nations.
We are more heavily-weighted in the U.K. than on the continent, particularly in the British home-building sector, where we are finding exceptional value and single-digit P/E multiples. Some of our favorite names here include Barratt Developments PLC and George Wimpey PLC.
S&P: Are you avoiding European exporters due to the continued weakness of the U.S. dollar?
HORN: We have been reducing our exposure slightly to some big European exporters, like Scandinavian paper- producers, which count the U.S. as a major customer.
The weak dollar is of great concern to us. For example, we are avoiding German machinery companies, which will be greatly hurt by the soft dollar.
S&P: Are you seeking to buy stocks in the surging Eastern European markets?
HORN: We have almost no position there, but we are monitoring the region. One problem is that these markets remain highly illiquid, and it’s difficult for foreigners to buy some of these stocks.
We have actually been reducing our exposure to the emerging markets over the last quarter — particularly Thailand, South Korea and South Africa — as valuations have become more appealing in the developed markets. For example, our lone holding in Thailand, Total Access Communications, skyrocketed 161% in the second quarter alone.
S&P: Are you interested in investing in Japan, which appears to have rebounded?
HORN: We have a lot of interest in Japan now. It has been creeping up in our country rankings. However, we tend to look for undervalued stocks with high sustainable free cash flow. Japanese companies have yet to deliver on the cash- flow parameter.
Recently, we have been seeing signs that Japanese corporations are seeking to increase their operating cash flow and decrease capital expenditures. Historically, Japanese firms have taken their cash flow to build plants and equipment and, as such, we haven’t had any exposure in the Nikkei for several years. However, we are currently keeping a close eye on Japanese stocks with a strong focus on domestic operations, e.g., utilities and printing firms.
S&P: Why is China such an important component of global equity analysis now?
HORN: The fact that so much direct investment is going into China is fuelling a lot of economic growth in general. As a low-cost manufacturing center, China is receiving increasing amounts of outsourced contracts from Western companies — this shift in manufacturing capacity to countries like China is a particularly important growth engine for the global economy.
S&P: But does the massive movement of manufacturing capacity to China translate into good stock investments in China itself?
HORN: No. The outsourcing will primarily benefit local Chinese company owners, and some of the Western/Asian firms, which are moving their manufacturing operations to China to take advantage of low labor costs. However, it still remains difficult for foreigners to efficiently purchase Chinese stocks so we have stayed away. As a result, China is an indirect play for us.
S&P: Discuss one of your favorite stocks.
HORN: Impala Platinum Holdings Ltd., the South African mining company, is enjoying continued high and steady industrial and consumer demand. Platinum and palladium are used in catalytic converters, which have a multitude of applications. As more countries adhere to cleaner air laws, such converters will be in even higher demand.
S&P: What sector in the U.S. are you particularly bullish on?
HORN: We continue to like healthcare providers in the U.S., as exemplified by our largest holding, Pacificare Health Systems. This is one of the few sectors that is actually raising prices and can get away with it. These companies are throwing off a lot of free cash flow and demographics favor them tremendously. People are, in fact, willing to sacrifice higher wages to negotiate continued health care coverage.
Aside from Pacificare, we also own Wellpoint Health Networks Inc. (WLP), Anthem Inc. (ATH) and Oxford Health Plans Inc. (OHP) — all of which are solid businesses offering great value.