When Alex Muromcew, John Tribolet and Eswar Menon took over management of the Loomis Sayles International Equity Fund/A (LIERX) in the summer of 1999, they radically changed its investment style from “top-down value” to “bottom-up growth.”
The $81-million portfolio gained 33.7% for the 12-month period through April 2004, somewhat under-performing the average international fund, which rose 38.5%. Over the five-year period, however, the fund rose an average annualized 2.7%, compared to a 0.9% gain for the peer group.
“We look for companies growing faster than their industry peers,” said Muromcew. “This growth can either be in the top line, earnings or cash flow.” In addition, the team likes companies that are global market leaders with shareholder oriented management that has a strong track record and a clear business strategy. They also look for a catalyst, such as a new technology, a regulatory change, or some macroeconomic event, that they think will accelerate earnings growth for the company.
The managers begin with a universe of about 10,000 stocks and whittle it down to 600, screening by parameters such as market cap (a minimum of $1 billion), and free float (over $500 million). Then, they apply quantitative growth screens such as operating margins, net-debt-to-equity, earnings and sales. The ultimate result is a diversified portfolio of between 80 and 100 stocks. Currently, the portfolio holds 116 stocks.
The fund’s average weighted market-cap size will never be lower than two-thirds that of the MSCI EAFE Index, its benchmark, says Muromcew. That gives the team the flexibility to have some mid- and small-cap exposure, although they predominantly invest in stocks of large-cap companies.
The managers divide their responsibilities. Muromcew focuses on Developed Asia and Canada, Tribolet examines Europe, and Menon looks at the emerging markets, as well as global technology and global health care. One of the other two have to approve any proposed “buy” decisions.
As of March 31, the fund’s ten top holdings are Roche Holding AG, 2.3%; Erste Bank der Oesterreichischen Sparkassen AG, 1.9%; Samsung Electronics, 1.9%; Synthes Stratec Inc., 1.6%; Wienerberger AG, 1.6%; Vodafone Group (VOD), 1.5%; Man AG, 1.4%; Mitsubishi Tokyo Financial (MTF), 1.4%; Smith & Nephew plc (SNN), 1.4%; and Embraer-Empresa Brasil (ERJ), 1.3%.
To control risk, the fund does not allow any individual holding to occupy more than 5% assets. While the fund has exhibited lower volatility than the average international equity fund over the past three years, its portfolio turnover rate is about double the peer average.
“Samsung Electronics made more money last year than the top five Japanese industrial companies combined,” Muromcew said of one of the fund’s top holdings. “Samsung has stayed well focused, and executed well in terms of engineering and design. It’s a leader in cellphones, DRAMs, flat-screen technologies and consumer electronics.” He added that Samsung’s operating profit margin, balance sheet and return-on-equity are the “best in its industry,” and that its stock trades at a forward P/E of only 11.
The fund’s largest country allocations as of March 31 are in Japan 23.8%; U.K., 14.6%; Germany 7.3%; Switzerland 6.9%; and Netherlands 4.2%. Relative to the benchmark, the fund keeps allocations for the larger countries within 1000 basis points, and for smaller within 500 basis points. The fund limits exposure to the emerging markets to a maximum of 20%. Its weighting in emerging markets currently stands at 11%.
Muromcew firmly believes that Japan’s economy has finally bottomed out, and will continue to rebound strongly. He thinks the rebound in Japan is real because GDP growth has been driven by strong external and domestic demand and corporate restructuring, not by government fiscal policy. “In such an environment, banks and financials have some of the greatest leverage,” he noted. “One of our largest holdings, Mitsubishi Tokyo Financial, is the top Japanese bank with the highest credit quality.” Though Japanese banks have been criticized for poor disclosure and lax standards, Muromcew says Mitsubishi has been an exception, and has “very conservative management.”
Picking the right stocks in Japan was a big part of the fund’s recent strong performance, Muromcew said. “Japanese companies are restructuring piecemeal; cutting costs, lowering operating leverage, and shifting some production to China,” he said. “We have been shifting away from the big blue chip exporters to industrials and domestic plays.”
As of March 31, the fund’s largest sectors are financials, 21.1%; consumer discretionary, 13.8%; industrials, 12.9%; health care, 12.8%; information technology, 12.1%; materials, 9.5%; telecommunication services, 5.4%; and consumer staples, 5.3%. While financials are generally regarded as “value” stocks, Muromcew points out that the fund is underweight in them since they make up the largest sector in the MSCI EAFE Index at 26%. Muromcew also counters that financials can indeed be “growth” stocks, citing fast growing Swiss bank UBS AG.
Muromcew and his team typically sell a stock if the original investment premise is no longer valid or if the fundamentals deteriorate. He also will sell if he finds a more attractive investment. “We are very quick to cut our losses,” Muromcew noted. In the end of the first quarter, the fund sold off Xstrata PLC, a British-based mining company with global operations.
“Their most important earnings drivers are copper and coal,” Muromcew said. “But we sold it when we deemed that copper and coal prices had reached a short-term peak. We also got very nervous about China, which has become the biggest driver for commodity prices. We trimmed back our indirect exposure to China, most of which was through investments in metals and mining companies.”