Global Conqueror : SoGen International's Helmsman Scans the World for Value Without Regard to Market Timing or Sector and Regional Trends

L.A. Times Archives

Nov. 12, 1996 12 AM PT

Since 1979, Jean-Marie Eveillard has steered the SoGen International Fund--an affiliate of the French bank Societe Generale--to returns that have outstripped those of the Standard & Poor’s 500, yet with risk levels below those of most other global funds. The fund, accordingly, has ballooned from $15 million to $3.5 billion.

His current allocation mix is about 33% foreign stocks, 22% U.S. stocks, 15% bonds (domestic and foreign), 7% gold-related securities and 23% cash. Eveillard, 56, also manages the SoGen Overseas and SoGen Gold funds. He is a native of Poitiers, France. He spoke in his New York office with Times staff writer Thomas S. Mulligan.

Times: You operate with very few restrictions, investing in stocks, bonds, metals and sometimes exotic assets, and you look over the entire globe. With a playing field that large, how do you focus?

Eveillard: It’s an approach that might be regarded as haphazard. Every day, my five associates’ desks and mine are inundated with a tremendous amount of material, from sources we have accumulated around the world. The investment process in essence is for us to go through that mail. A good chunk of it ends up in the wastebasket very quickly, where it belongs. Some of it ends up in the files. The rest--which is much less than one-third--we decide to investigate further.

Times: You have a reputation for patience.

Eveillard: We hold securities on average for five years. We have a turnover ratio of less than 5% annually. Somebody once said that short-term, the stock market is a voting machine which measures the perceptions of investors, who vote through their purchases of securities, while long-term, it’s a weighing machine which weighs realities as opposed to perceptions.

When we make a mistake, which happens regularly, it’s not a matter of having misread market psychology. It’s because we’ve made the wrong medium-term assessment of a particular corporation.

Having a five-year horizon means we don’t spend time trying to figure out whether the German stock market over the next six or 12 months is likely to rise more or less than the Japanese stock market. Investors who operate from a top-down point of view--who start out by deciding which market they will be in--do spend time trying to figure that one out. We’re mostly bottom-up, so we don’t worry about it.

On the other hand, I don’t think anybody from a global point of view can be entirely bottom-up because, after all, there is a difference between investing in Switzerland and investing in Indonesia.

Times: You have a large cash position, about 23%. Does that mean it’s hard for you to find bargains?

Eveillard: We’ve been on the side of caution for the 18 years that I’ve run the fund. Sometimes I say to myself, “What’s the point of trying to run a fund for all seasons if the sun always shines?” And the sun has been shining over the past 18 years with very few interruptions.

But the caution, maybe it has to do with my European background. Europeans, at least of my generation, tend to be more skeptical than Americans. Maybe it has to do with the fact that my own money’s at stake. Other than some emergency money in a money market fund, my entire financial portfolio is invested in the International Fund and the Overseas Fund.

Times: How do you judge prices? Do you have any hard and fast rules?

Eveillard: I believe we belong to the value school. It’s a big tent, but in essence the value investor wants to buy for 60 or 65 cents--50 cents if he’s really greedy--what he perceives to be worth one dollar today. The idea is that after a year or two if you have to acknowledge that, gee, you made a mistake and what you perceived to be worth a dollar was worth only 50 cents--if you paid only 60 or 65 cents for it, you lose money but not a tremendous amount.

On the other hand, as Warren Buffett said, I’d rather pay a fair price for a good business than a good price for a fair business. If our perception is the business is really good, we’re willing to pay more. We own the stock of Pulitzer Publishing, for instance. We’re still holding on to it, even though on conventional valuations such as price-to-earnings ratio it looks expensive, because we really like the business, the capacity to generate cash, especially.

Times: You have an eclectic mix among your largest holdings--gold and copper mining, a central bank, heating equipment, hotel management--so you’re not really a picker of sectors?

Eveillard: We are not really theme investors, but anybody who looks closely at the portfolio can see that maybe there are a few themes. For instance, for many years, U.S. investors have seen media-related businesses as being better than run-of-the-mill industrial/commercial enterprises--which they are. Accordingly, the prices of those securities have been pushed upwards.

But it seemed to us that outside the U.S., investors were not paying the same attention to media-related businesses. When we came across Day Telegraph, the leading newspaper in the Netherlands, we were struck by how cheap the stock was in absolute terms and particularly relative to Knight- Ridder or Gannett or Times Mirror in the U.S.

Times: Is there a particular stock purchase that demonstrates your approach?

Eveillard: We’ve owned the stock of Buderus in Germany over the past one or two years, and it’s one of our biggest holdings, with a bit over 1% of total assets. It’s a mundane business, but with our approach we’re more likely to own the stock of a plumbing company than we are to own the stock of a technology company.

Buderus is not exactly in the plumbing business; they’re a manufacturer of heating systems. It’s an appliance business, basically, with not much growth, but when we looked at it we saw three things:

No. 1, it’s very profitable, more than a 20% return on equity, and the company has no debt.

No. 2, we saw we could buy it at about 12 times earnings and five times cash flow, and the earnings are probably understated for tax reasons.

No. 3--and this is the margin of safety--they own a lot of real estate, mainly apartment buildings, which used to be employee housing years ago. From our point of view, if we’re wrong about the heating business, the real estate will provide some cushion.

Times: Gold is 7% of your portfolio now. What’s the appeal?

Eveillard: It’s a matter of perceiving that the downside risk is modest on two counts:

No. 1, the price has already been cut in half in nominal terms over 15 years, so presumably most of the damage has already been done.

No. 2, there continues to be very strong jewelry demand coming from developing countries, particularly Asia. So it’s the idea of owning a depressed asset where the downside risk is modest, but acknowledging that I have no insight whatsoever into the timing and the extent of a move upwards.

Times: So you’re not a timer?

Eveillard: Timing is truly not our forte. We got completely out of the Tokyo stock market in mid-’88. We owned zip--nothing--in what was then the second-largest equity market in the world. We decided that we were value investors and in the summer of ’88 everything was atrociously expensive there and accordingly we didn’t belong there anymore.

In the following 18 months the Tokyo stock market managed to go up another 20% or 25%, and in that respect I’m mighty glad I’m a mutual fund manager because I think if I had been in the pension fund business every client would have fired me. “How can you dare own zip in the second-largest equity market in the world at a time when it’s still going up?” But our attitude is we’ll play our game, and if it’s no longer our game, we won’t play.

Times: The postscript, of course, is that after peaking at the end of 1989, the Tokyo stock market had a horrifying collapse, losing more than half its value over the next three years. Your approach has been described as “cautiously aggressive.” That sounds like a contradiction.

Eveillard: We don’t appeal to aggressive investors because we’re not aggressive ourselves. We only appeal to defensive investors, people who are more worried about losing money than they are eager to make as much money as possible.

In the mid-’80s and early ‘90s, because we are somewhat ill at ease with the emerging markets, we had almost completely missed out on the opportunities in Mexico, Argentina and Brazil. But in December of 1994 when the Mexicans let their currency go and all hell broke loose, I thought, “Well maybe I missed the first opportunity, but this could be a second one.”

I saw that I could buy the so-called Brady bonds with yields of 18%, 20%, 22%. They’re dollar-denominated, so there’s no currency risk. My attitude was, those are equity-type returns, so we can gain exposure to Latin America though the Brady bonds, as opposed to fishing among equities.

I would argue that it was not an aggressive investment on two counts:

No. 1, we never make huge bets, so I said from the start that we would not have more than 5% of our assets in the Brady bonds.

No. 2, risk has to do with the nature of an asset, of course, but it also has to do with the price. If the yield had been 10% or 12%, I would not even have looked at them. Although the risk of default appeared modest, it was not nonexistent. But at 18% or 22%, I felt I was being paid for that risk.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

SoGen International

Category: Global stocks and bonds

Strategy: Seeks long-term capital growth by investing in foreign and U.S. stocks and bonds.

VITAL STATISTICS

Year-to-date total return: +11.3%

5-year total return (through Sept. 30) +84.4

Avg. global stock fund 5-year return: +71.9

Five biggest holdings (as of Sept. 30):

1. Freeport McMoRan

2. Bank for Intl. Settlements

3. Buderus