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Fund in Focus: Evergreen Global Opportunities Fund

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Jan. 25, 2005 — The $111-million Evergreen Global Opportunities/I (EKGYX) can keep up to 70% of its assets in U.S. stocks, or it can invest the same amount abroad, depending on where its managers see the best opportunities.

Lately, domestic equities have accounted for only about a third of the fund’s holdings. Francis Claro, who oversees the foreign part of the portfolio, says Evergreen Global been favoring international companies to take advantage of the weak U.S. dollar, and because their stocks are more attractively valued.

The stock mixture for the institutional fund (a retail version is also available) resulted in a gain of 23.7% last year. That put it ahead of the average global equity fund, which returned 19.7%. The Evergreen fund has stayed in front of similar offerings over longer periods as well. For the five years ended in December, it returned 3%, on average, versus a gain of 0.3% for its peers.

In picking stocks, Claro looks for financially sound, growing companies, whose shares strike him as bargain priced. He leans towards those with improving earnings, sales, margins and balance sheets. He wants to buy stocks that are trading below their historical valuations, and for less than shares of a company’s competitors.

At the end of last year, the stocks in the fund’s portfolio sported a price-to-earnings ratio of 17.2, and a price-to- book-ratio of 2.6. By comparison, similar funds had multiples of 20.36, and 2.79.

Businesses that Claro thinks may benefit from a restructuring or a management change pique his interest, too.

Both managers don’t mind betting on unprofitable companies if they think that condition is only temporary.

Like his colleague, Bisson, who runs the domestic part of the portfolio, scans for companies that fatten their top and bottom lines at an above-average rate, and he wants them to have a competitive edge that will enable them to keep growing. Bisson, who puts investments into three categories, describes these as “core” companies.

Bisson also keeps an eye out for companies for which analysts’ estimates are low but increasing, and stocks that have have pulled back because of a problem he believes will prove short-lived.

The fund hunts for investments among small-cap stocks.

Claro says he and Bisson are willing to invest in companies that aren’t widely followed by analysts and whose shares aren’t very liquid and “might take a little bit more time to bear fruit.” Stocks that are largely ignored by Wall Street can take off when big brokerage houses begin tracking and touting them, he pointed out.

“We feel that we’re in a universe that has more inefficiencies,” Claro said. And as investors, the managers “try to exploit these.”

One stock Claro likes is Bull SA, a French computer and software maker that also provides information technology services. The company is one of the fund’s top holdings.

Bull, which has a troubled financial history, this month got 517 million euros in restructuring aid from the European Commission that Claro says has enabled the company to put cash on its balance sheet.

The company has been improving its business by “more forcefully” entering the server market with new products, Claro said. Bull, whose stock is trading for less than others in its industry, is also a potential takeover target, he said.

Another of the fund’s biggest stocks is Ashtead Group Plc., which rents construction equipment. The British company is the leader in its field in the U.K., but it does the majority of its business in the U.S., where it has benefitted from an upturn in non-residential construction, according to Claro.

Ashtead was hurt by overcapacity in its industry earlier in the decade, but it has strengthened its finances by selling assets and cutting capital expenditures, Claro said. As a result, its balance sheet is improving, and its earnings are “rebounding significantly,” he said.

On this side of the Atlantic, Bisson cited F5 Networks (FFIV) as an example of a typical investment for the fund. The company manufactures software that lets companies manage Internet traffic.

“They’re on a roll,” he said of the company, whose revenues rose 66% to $60 million, and whose net income rose to $10 million from $3.8 million in the quarter ended December 31. Bisson expects analysts to raise estimates for the company “rapidly.”

Seattle-based F5 was one of the fund’s biggest winners last year, along with home builder Meritage Corp (MTH), Bisson said.

Although Meritage’s profits and sales have been increasing, it’s stock trades for only about 10 times projected earnings, he said. The company stands to gain if the U.S. economy remains healthy, and interest rates stay relatively low, Bisson added.

When it comes to selling, the managers will unload a stock if they find a better investment, or if a company’s financial fundamentals appear to be eroding. The latter reason lead thm to sell telecommunications equipment maker Ditech Communications (DITC) late last year, Bisson said.

One of Ditech’s largest customers, Nextel Communications`A` (NXTL), agreed to be acquired by Sprint Corp(FON Group) (FON) in December. Bison said he expected the combined company to freeze capital spending, which would have dealt a blow to Ditech.

Overall, the rate at which stocks enter and leave the portfolio can vary, depending on how often the managers change their allocation of foreign and domestic stocks. The fund’s turnover rate was 257% last year, compared to 111.2% for similar funds, because they were moving into companies abroad, Claro said.

As for the fund’s focus on small-cap stocks, Claro agreed that it can sting investors when large-caps are in vogue. “But we think that in the long run we’ve got some great companies to work with,” he said.

Contact Bob Keane with questions or comments at: [email protected].


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