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.