A World of Differences : Janus’ Hayes Sees Opportunity in Changes in Europe, Other Regions
Helen Young Hayes, the daughter of a retired physics professor, has achieved some critical mass of her own in the investment world, guiding Janus Worldwide to the best five-year performance of any mutual fund in the world-stock and global category tracked by Morningstar Inc. of Chicago.
Hayes, 34, was born in Berkeley, grew up in Starkville, Miss., earned an economics degree from Yale and cut her stock-picking teeth at Fred Alger Management before joining Janus Capital Management of Denver in 1987. Hayes, a triathlete who’s fluent in Mandarin Chinese, took over at the helm of Janus Worldwide in 1992. She also runs Janus Overseas, a younger, smaller sibling fund that invests almost exclusively in foreign issues.
Hayes was interviewed by Russ Wiles, a financial writer based in Phoenix.
Times: The U.S. stock market obviously has benefited from a tail wind recently. Do you expect that wind to change direction at all, perhaps favoring some of the foreign markets?
Hayes: Our economic expansion has been running much longer than the recoveries in Japan and Europe, which are still bumping along the bottom of the recent recession. From that simple perspective, I would expect that foreign markets, from where they are in the economic cycle, will operate within a better macroeconomic environment in the future.
Times: Recognizing that you take a bottom-up approach, focusing mainly on individual companies, are there any foreign nations or regions that you favor at the moment?
Hayes: The largest part of both portfolios is invested in Europe. In Europe, of course, you have many individual companies, and each of those is sliced up into hundreds if not thousands of different investment opportunities. But there do seem to be some tendencies or trends within Europe that are generating this big percentage of ideas for me.
Times: Such as?
Hayes: First, there is a dramatic restructuring effort such as we saw here in the U.S. in the 1980s. The wave is just now starting. It’s very exciting.
Second, there is a trend toward an increasing emphasis on shareholder value. This has been part of the U.S. culture for decades, especially during the ‘80s and ‘90s. We don’t have that some phenomenon occurring in Europe on a wide scale yet, but things are changing.
For example, [until recently] there had been no common German phrase for “shareholder value.” Whenever German managers would refer to it, they’d switch to English. Major German companies like Hoechst, a pharmaceutical-chemical company, suddenly have totally reoriented the way they do business. Previously, Hoechst had a multifaceted mission statement. The company wanted to be a responsible citizen, gain market share, get big and so on. Now, it’s focusing on just one single thing: shareholder value. The shareholder-value phenomenon is dramatically changing the way managers view their companies in Europe. I own Hoechst and still like it very much.
Another, similar, trend has seen more Europeans invest in the stock market. Roughly 5% of the German population invests in equities--a very low percentage compared to Americans. But that’s increasing dramatically, with the percentage of German wealth in mutual funds having doubled in the past five years.
Finally, there are other particular trends in Europe that are driving the fundamentals of some of the companies I own. One is an information-technology boom. This same trend has catapulted the earnings of U.S. companies for 16 or 17 years, but it’s just now becoming a focus in Europe. Another is a trend toward outsourcing. Put them all together and you see why Europe looks so good.
Times: Besides Hoechst, what other European holdings exemplify what you seek in a company?
Hayes: Hoechst is attractive because it is restructuring and because of management efforts to increase the return on invested capital, earnings growth and the profitability of the company.
Then there are Ciba-Geigy and Sandoz, two Swiss stocks that I own [the two companies are about to merge]. These are fairly similar companies to Hoechst in that they are pharmaceutical-chemical conglomerates. The reason I own both is that they are participating in another trend in Europe called intelligent merger-and-acquisition activity. The pharmaceutical industry is undergoing rapid consolidation, as is the chemical industry. This is something we have experienced in the U.S. over the past decade, but it’s just beginning to hit Europe.
The attraction of Ciba and Sandoz in particular is that they had an incredible overlap of their businesses in terms of overhead-type expenses. In fact, they’re even headquartered in the same city. I expect that they will be able to take 700 million Swiss francs out of their expense structure over the next three to four years. They’re looking to reduce certain personnel expenses by as much as 20%. This illustrates the type of investment that attracts me--when companies in consolidating industries are able to eke out synergies on both the revenue and expense sides through a combination.
Times: How about a U.S. company that illustrates what you look for?
Hayes: My favorite U.S. stock is Wells Fargo. This is a company that’s actively reducing costs via bank closures, outsourcing and cuts in corporate overhead. Another thing that attracts me to Wells Fargo is that management is definitely working for shareholders by aggressively repurchasing shares. I think it’s a very smart way for them to spend their cash. They’re not going to spend it so wisely by chasing marginal loans right now. Plus, the stock is still at a low P/E [price-to-earnings] multiple.
Times: You haven’t talked about other regions of the world. Are you seeing many opportunities in Latin America or Asia?
Hayes: I think the values are becoming very attractive in Latin America. The only real question mark is whether the economies have definitely bottomed out.
In Asia, I’m finding that valuations are not as appealing, not as attractive. But there are some positive things going on there as well. For example, Toyota recently announced the first share-repurchase program by a major corporation in Japan. I prefer Honda actually, because Honda has a lot more momentum in terms of product introduction. I own Honda. But Toyota’s announcement was a milestone in Japan.
Times: Does Japan represent a large weighting in the portfolios?
Hayes: In general, no. It’s roughly 10% of both portfolios. You really have to be a stock picker in Japan based on the state of the economy and stock market there. You also have to be very patient.
One of my favorite companies in Japan, which I’ve held a long time, is NTT Data. This is a subsidiary of the big telephone company Nippon Telegraph & Telephone. NTT Data provides information technology as well as data networking. What makes it so attractive is that Japan practically has been in a depression in corporate profits, which means spending on information technology there is well behind what it is in the U.S. A lot of Japanese companies are using personal computers at one-half to one-quarter the penetration rate in the U.S. So I expect that information technology is going to be a huge growth business as the Japanese play catch-up.
Times: How often do you travel abroad?
Hayes: I tend to go in fits and starts. On average, I’m probably on the road about once every six weeks. I think it’s really important to meet management.
Times: What are you looking for when you meet with management?
Hayes: First, I think it’s important to look at the track record, to follow their decisions, to see how these decisions have added or subtracted from shareholder values. I also like to track how visionary management proves to be in terms of detecting trends in the industry. And I want to know what they intend to do with the company in the future and how they will execute that strategy. Finally, I want to know what their incentives are and how much they care about shareholder value.
Times: What’s your policy on hedging? And where do you stand currently?
Hayes: I hedge to protect my investments in countries where I feel there is a risk of devaluation of the local currency versus the dollar. Currently, we’re about 50% hedged in the European countries, which is a reasonably neutral position.
Times: How about cash? Do you like to stay fully invested?
Hayes: The funds’ cash holdings are the residual of my stock picks. Cash tends to rise or fall, depending on the pace at which I’m finding ideas and taking profits, and the pace of cash flow into the fund. Currently, the cash positions for Worldwide and Overseas are 14% and 16%, respectively. The average range is anywhere from 5% to 15%.
Times: Earlier in the year, you seemed to have a higher percentage of the funds’ assets in U.S. holdings. Now it has dropped. Why?
Hayes: The U.S. weighting has indeed come down in Overseas and is currently zero. The fund can own up to 35% of its assets in the U.S., but I save that kind of leeway for very special U.S. situations. Overseas generally has no U.S. holdings, and that is the case currently. But I definitely took advantage of the market sell-off in July and bought more U.S. stocks for the Worldwide fund. U.S. stocks have been between 10% and 15% of this portfolio over the last 12 months. They’re at 12.5% currently.
Times: So you still seem to be seeing a lot of opportunities in international markets?
Hayes: That’s true. The bulk of the new stocks that I’m putting in the portfolios are coming from Europe.
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