Fund in Focus: Loomis Sayles International Equity Fund

“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.”