Quick Take: The $200-million Henderson International Opportunities Fund/A (HFOAX) approaches mutual fund investing in a somewhat unusual way. Five independent management teams, each with their own areas of expertise and stock-picking styles, work independently to create a concentrated portfolio of companies of all shapes and sizes.
Iain Clark, the London-based chief investment officer of Henderson Investment Management Ltd., oversees all the managers, but does not dictate stock picks. Rather, Clark imposes a top-down asset allocation strategy, but allows the various managers to freely choose stocks within their respective domains.
The fund struggled to beat its peers the past year, but has soundly trounced them over the longer term. For the one-year period ended August 31, it rose 17.8%, versus 23.1% for its benchmark, the MSCI EAFE Index, and 18.6% for the average international fund. For the three-year period, the fund rose 15% annualized, versus 4.8% for the benchmark, and 3% for the peer group.
Henderson International Opportunities is a little more volatile than its peer group. The portfolio also carries higher expenses, 2.00% versus 1.66% for the average international stock fund. Clark has overseen the portfolio since inception in August 2001. Based on risk-adjusted three-year returns, it receives Standard & Poor’s highest ranking of 5 Stars.
The Full Interview:
S&P: How is this portfolio run?
CLARK: We use a multi-manager approach, and I serve as the asset allocation strategist. We have five portfolio management teams, each with their own areas of expertise: European All-Cap is covered by Stephen Peak; European Small- & Mid-Cap by Tim Stevenson; Global Technology by Stuart O’Gorman and Ian Warmerdam; Japan by William Garnett and Jeremy Hall; and Asia-Pacific-excluding Japan, by Kok Boon Lim & John Crawford.
Each team has its own investment style. Peak has a slight ‘value’ investing bias, while Stevenson adheres to a slight ‘growth’ orientation. The management teams make the buy and sell decisions autonomously for their own portions of the fund. The managers cannot invest in regions or industries outside of their respective mandates.
S&P: What is your role?
CLARK: To establish the overall asset allocation, which is based on macroeconomic factors, valuation concerns, and relative opportunity analysis, among factors. The teams are scattered around the world, and I confer with each of them formally on a monthly basis to review their holdings and ideas. I meet with them informally on a more frequent basis to discuss their stocks. The individual stock picks primarily drive this fund’s performance, not sector nor regional allocations.
S&P: How much of the fund is allocated to each team currently?
CLARK: Peak’s portion is currently about 35% of the fund’s assets, Stevenson has been allocated about 20%, Global Technology accounts for about 10%, the Japan team represents about 20%, and Asia-Pacific is at about 10%.
We keep the fund highly concentrated — currently we hold about 50 stocks. Peak, who has the largest pool of assets, can invest in about 15 stocks, while each of the other teams invest in about 10 names.
S&P: How much can these allocations vary?
CLARK: Peak’s portion was as high as 43% in June 2003, but we felt European small and mid-caps reached fair value, and moved some assets towards Japan and Asia-Pacific, where we found some compelling stock prices.
Any changes in allocation would likely be a result of my views on what regions or sectors in the world appear to offer the most attractive values. It may also reflect the nature of the specific stocks in a sub-portfolio.
We like to keep a broadly diversified international portfolio. It is extremely unlikely that we would ever, say, mandate 20% in Europe and 80% in Japan.
S&P: What is your current country allocation?
CLARK: As of Aug. 31, 2004: U.K., 22.9%; Japan, 21.7%; Switzerland, 11.1%; France, 8.7%; U.S., 6.9%; South Korea, 6.3%; and Thailand, 5.3%.
S&P: Do you have any exposure to emerging markets?
CLARK: Yes. Our allocation in Asia-Pacific includes some stocks in Korea and Thailand. We don’t hold any stocks in Latin America, however, by mandate. Our European teams could conceivably invest in Eastern Europe or Russia.
S&P: What is your current sector allocation?
CLARK: As of Aug. 31, 2004: industrials, 20.0%; financials, 20.0%; consumer discretionary, 18.8%; information technology, 13.4%; health care, 10.8%; and consumer staples, 5.5%.
S&P: What are your top individual holdings?
CLARK: As of Aug. 31, 2004: Swire Pacific [Hong Kong real estate manager & developer], 3.2%; Shinhan Financial Group [Korean diversified bank], 2.8%; Tesco PLC [British food retailer], 2.8%; Renault S.A. [French automaker], 2.7%; Bangkok Bank [Thai diversified bank], 2.7%; Sanofi Aventis (SNY) [French drug and biotech firm resulting from the takeover of Aventis by Sanofi-Synthelabo], 2.6%; Regal Petroleum [British oil & gas], 2.6%; Mitsui & Co. Ltd. [Japanese trading company], 2.5%; and Secom Co. Ltd., [Japanese security systems company], 2.5%.
The top ten stocks account for about 27% of the fund’s total assets.
S&P: To what do you attribute the fund’s three-year outperformance relative to the Index?
CLARK: In the opening days of the fund’s operation, in August 2001, we initiated a rather high 25% weighting in technology, which had been badly beaten down. From October 2001, tech began to outperform, and greatly helped our performance.
Over the three-year period, Stephen Peak has been the single biggest contributor to our returns. His stock selections have consistently outperformed his respective benchmark. NDS Group plc (NNDS), which has been in Peak’s portfolio since inception, has probably been our top-performing individual holding. Stevenson also had a very good year in 2003 with his small- and mid-cap picks in Europe.
In 2004, we were helped by raising our exposure to Japan in February. We caught the big rally in March and April, then took some profits off the table.
S&P: Overall, does the fund has a large-cap bias?
CLARK: No. We can invest without regard to market-cap size. However, the fund’s weighted average market-cap has risen to about $7-billion/$8-billion from about $1.5-billion/$2-billion two years ago. Still, that is far below the benchmark’s $20 billion.
Both our European and Asian managers currently have a good mix of large and small-cap companies; but as small-cap stocks around the world have become fairly-valued, even over-valued in Japan, larger-cap stocks appear more attractive now.
S&P: What asset-allocation strategy are you taking now?
CLARK: We are adopting a mildly cautious outlook on global markets, but I would not say we are taking a bearish view. From a top-down perspective, we expect economic growth will be slower next year than what most observers are forecasting, due partly to high oil prices and weaker consumer sentiment in the U.S.
Earnings prospects for 2004 should also be tepid, perhaps 5% in Europe and 5%-10% in Japan. Stock valuations around the globe will likely remain in a tight range. As a result, it’s getting trickier to find stocks with high earnings visibility and predictability. The market tends to over-punish companies that deliver earnings disappointments, and we want to avoid those kinds of stocks.
Contact Bob Keane with questions or comments at: [email protected].