For Barnaby Wiener, it’s cool to be cautious and stubborn. As lead manager of the $476.8-million MFS International Value Fund/A (MGIAX), once he’s selected a stock, he is reluctant to second-guess himself. “You only make one entirely objective decision on a company — that’s when you first do the work on it,” he said. “Thereafter, your opinions are swayed by emotions.” He’ll change his mind only if “the evidence is really clear.”
This stoicism keeps turnover in the fund to a relatively modest 37.0%, compared with the 71.5% average of its international equity peers. It has also gained a slight edge for the fund, which returned 24.1% (annualized) over the three years ended Dec. 30, 2005, versus the peers’ 22.0% average gain. For the five-year period, the fund rose 8.4%, versus 3.6% for the peers. For the one year period, however, the fund lagged slightly, returning 14.3%, versus the peer group’s 14.5%. The fund’s expense ratio, 1.65%, is slightly higher than the peer average of 1.55%.
Wiener describes his philosophy as “value, but not deep value.” He’s looking for companies whose share price is temporarily undervalued but whose underlying business is predictable and whose long-term potential for returns and cash flow are strong. He avoids speculative stocks and companies whose high rates of sales growth may be difficult to sustain or reliably forecast.
Wiener uses several quantitative models to screen a universe of about 2,000 non-U.S. stocks. A team of 20 analysts contributes more in-depth analysis and assists Wiener in interviewing company managers. Wiener concedes that the fund’s 134 holdings as of Dec. 30, 2005, may be more than needed to achieve diversification and can preclude meetings with companies in which the fund holds only a small stake. But they help avoid concentrating its assets. The fund’s 10 largest holdings represented only 20.6% of assets as of Dec. 30.
The fund’s performance benchmark is nominally the MSCI EAFE index, with its roughly 1,000 stocks in the developed non-U.S. markets in Europe, Australasia, and the Far East. However, the fund isn’t tied to the index’s universe of stocks nor its market cap and sector weightings. Indeed, developing markets currently represent only about 8.6% of the fund’s assets. About half that amount is invested in South Korea (which Wiener regards as a developed country in some regards). However, Wiener says he is more careful about investing in developing markets because “more can go wrong” there.
For this reason, Wiener prefers the relative safety of the developed markets. As of the end of 2005, the fund’s largest country allocations comprised U.K. (21.9%), Japan (19.2%), France (15.9%) and Germany (6.9%). The fund’s largest regional concentration is in European stocks, whose valuations he finds relatively cheap; Wiener also favors mid- and large-cap companies. The fund has 63.3% of its assets invested in large-cap stocks, 21.5% in mid-caps and 15.3% in small-caps.
He cites Nestle S.A., the fund’s largest position at 3.1% of assets, as a typical holding. “It’s a global food company operating hundreds of companies, with a stable business,” he said. “It’s hard to see an environment where it misses earnings by more than 3%.” Other top holdings include Total (TOT), Vodafone Group (VOD), Takefuji Corp., and Tokyo Gas Co. Ltd.
Wiener takes a broad view on risk, which he defines in absolute rather relative terms. In composing the portfolio, he considers the stability of each company’s business, as well as the diversification of holdings by sector and industry. Reflecting this cautious, fundamental approach, the fund’s volatility, as measured by standard deviation, was 10.48 as of Dec. 30, 2005, lower than its peers’ 11.86 average.
Because the market-cap weighting of the benchmark reflects the fluctuating values of certain industries, Wiener says he’s “happy” to let the portfolio sector weightings diverge from the index. For instance, the fund’s 20.5% weighting in financial services is well below that of the EAFE, which was 28.4% as of January 25, according to MSCI. “All sectors have systemic risk — financials particularly,” he said. “Things are more likely to go wrong at the sector level than at the stock level.” For this reason, Wiener relies on stock selection and diversification to boost returns, as opposed to top-down considerations.
In addition to financial services, the fund’s largest sector holdings are in utilities and communications (16.3% of assets as of Dec. 30), consumer staples (10.5%), energy (10.5%), and “automobiles and housing” (8.6%).
Wiener says he’ll sell a stock if deteriorating fundamentals undermine the reason for which he bought it. For example, in December 2005, he unloaded a position in Japanese firm Sekisui Chemical Co. Ltd., after trends affecting its pre-fab housing business proved weak and the company’s restructuring plans sputtered. He had patiently held the stock for nearly two years.
Wiener will also divest a stock that has appreciated to a level of fair or high valuation, preferring “stocks everyone hates to those everyone loves.” Toward the end of 2005, for example, he sold Toyota Motor (TM), whose valuations had become “stretched,” and bought Nissan Motor Co. ADR (NSANY), whose near-term outlook was clouded by earnings pressure and a sparse pipeline of new products (as of Jan. 21, 2006, Nissan’s price-earnings ratio was 16; Nissan’s was 10.) He’s expecting the automaker’s fortunes to improve in the second half of 2006 as new models hit the showroom. “It’s a classic example of the market having a short-term focus,” he said of Nissan’s share price.
Looking ahead, Wiener is relatively optimistic about prospects in continental Europe, seeing potential for modest recovery in France and Germany in particular. But in general he holds his enthusiasm in check. “The bull case is that valuations are not stretched compared with other asset classes like bonds,” he said. “But bond yields might be low for a reason: long-term growth expectations are low, and equities could suffer.” He added, “I struggle to be bullish.”
Contact Bob Keane with questions or comments at: email@example.com.