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Buying American

L. Roy Papp owns an internationally renowned collection of Chinese paintings from the 16th through 19th centuries. But when it comes to investing, Papp likes to buy American--specifically, the biggest U.S. multinational companies.

Papp believes that the global trade boom is a high-return investment trend. But his $50-million-asset Papp America-Abroad stock fund seeks to capitalize on that trend by concentrating almost exclusively on U.S. blue-chip firms.

Foreign stocks, in Papp’s view, are too dangerous for reasons of currency risks, accounting differences and regulation.

Thanks to the surge in U.S. blue-chip stocks in recent years, the fund has flourished. From its inception in 1991 through April 13 it has risen 129%, besting the Standard & Poor’s 500 index and major global indexes.

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Papp, 69, spent the first two decades of his investment-management career at Stein Roe & Farnham in Chicago. He was appointed by then-President Ford to serve as the U.S. Director of the Asian Development Bank in Manila.

Two years later, he founded L. Roy Papp & Associates, a Phoenix-based investment firm that now manages $630 million. Of that, about $100 million is spread among Papp America-Abroad, the L. Roy Papp Stock Fund and the new Papp America-Pacific Rim Fund.

Papp was interviewed by Russ Wiles, a mutual funds columnist for The Times.

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Times: Many investment pros are telling clients to buy foreign stocks this year rather than U.S. stocks. You’re obviously not among them.

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Papp: Foreign economies are growing faster than the United States’, and we want to participate in that growth. But we’re scared to take the risks of owning most foreign stocks. So we target U.S. companies whose total activities are international.

By sticking primarily with U.S. companies, we avoid the foreign currency, accounting, and possible social and political problems. We also avoid the risk of a major currency devaluation such as Mexico’s [in 1994]. We think it’s a much safer way to invest globally.

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Currently, of the companies owned by the fund, 54% of their earnings come from foreign operations.

Times: What about the argument that big-name multinational stocks have run their course after such strong relative performance in recent years?

Papp: I don’t think so. These companies are the ones operating in global markets. They have the brightest futures. Consequently, investors have figured out that these companies are more valuable. It’s not a “Nifty Fifty” replay of 1972 [when blue-chip stocks soared, then crashed]. It’s a movement to the area of the market that’s growing best and which also happens to be the safest.

Times: What are some of your favorite holdings in the Papp America-Abroad fund, and why?

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Papp: Factors we look at include earnings growth rates, predictability or safety, and a stock’s price. Two favorites are Coca-Cola and Gillette, which we hold but in small amounts because they have become expensive. The same goes for Microsoft. We’ve never sold Microsoft shares, but we have not bought any recently.

What would I buy today? One example is the Interpublic Group, a worldwide advertising firm that does business for General Motors and Coca-Cola and has held these accounts for 30 years. It’s a long-established company. General Motors, Coca-Cola or any other company can ask them to put on an international advertising campaign, and Interpublic can do it. Not many competitors can. As American companies become more dominant in world markets, they spend more ad dollars abroad.

Times: Any other favorites that exemplify what you look for?

Papp: General Electric. The company derives around 36% of its earnings and sales abroad. Management has publicly stated that it hopes to raise that figure to 50% by the year 2000.

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This is a well-run company headed by Jack Welch. A lot of GE’s money comes from banking-type operations, where it deals in different markets within the financial world. The company has years of experience in this area, and now it’s taking its operations abroad. So suddenly GE has brand-new businesses in foreign countries, with the experience of knowing what it’s doing.

The stock trades around 20 times earnings. It’s the biggest U.S. company in terms of market capitalization. It’s solid and well-run, and it has entered markets of the future. So we think it’s attractive.

Times: It seems as if you like to buy the biggest and best players in an industry.

Papp: You can’t buy monopolies; they don’t exist. But we want to come as close to that as we can.

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Times: Do you stick with U.S.-headquartered companies?

Papp: Mostly. At present, every security in the America-Abroad fund is American. We have owned foreign-based stocks such as Reuters, Royal Dutch and Hong Kong Telecommunications. And we can put up to 30% of our assets in foreign stocks. But I don’t think we’ve ever had more than 12%.

And when I say we buy foreign stocks on occasion, that means we only can buy their ADRs [American Depositary Receipts] traded on a U.S. exchange.

Times: You stick with U.S. stocks to avoid currency risk, but don’t the companies themselves face that risk?

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Papp: These companies do face currency risk in terms of their earnings. When they bring earnings back to the United States, they’re affected by exchange rates.

But half of the countries in the world peg their currencies to the dollar, so for these there would be no change.

Also, Intel, VeriFone and many other companies sell their products abroad in dollars, so again there’s no currency risk. Many also have manufacturing facilities in foreign countries.

So we don’t face currency risk to a major extent. Contrast that to investing in stocks denominated in foreign currencies, from which you could lose 10% or 15% of your principal [because of currency shifts]. That’s a different ballgame.

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Times: How about market regulation? You have said that you’re happy American investors have the Securities and Exchange Commission overseeing our markets.

Papp: The SEC has made our market a lot more stable. It has prevented some of the rigging in terms of price that goes on in other countries. I don’t want to lose these protections by venturing abroad.

Times: How concentrated is the America-Abroad fund’s portfolio?

Papp: We usually hold 25 to 30 stocks, which I don’t think is concentrated at all. You get theoretical diversification when you go above 15 stocks. I don’t want to run an index fund, which is what people do when they hold 100 stocks or so. We are not market timers, sector rotators or momentum investors. We try to buy the best companies we can find trading at reasonable prices.

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Times: How do you research companies?

Papp: We base it on history, using the financial statements. We have seven chartered financial analysts, plus two people who each count 40 years of experience in the investment business, so we do our own research.

Times: What’s your take on the U.S. market’s recent weakness?

Papp: My feeling is that this is just a market correction. Investors perhaps got a little too enthusiastic at the end of last year, but I do not think stocks are grossly overpriced. I think this correction is mostly over.

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Times: There has been some speculation that the U.S. export boom might moderate a bit, particularly if the dollar continues to strengthen. Do you agree?

Papp: Quite the reverse. I think foreign trade in general is going to be a dramatic area of growth for the next 100 years. We are globalizing, becoming one world, growing more interdependent. Thank God we are, because it may cut down on the number of wars.

Times: You have said that you think Western culture is helping to increase demand for American products.

Papp: Yes, and I almost regret it sometimes, because rock ‘n’ roll, bluejeans and rap music are not to my liking. But the world seems to love these things, and more. Our technology is far ahead of that of other countries. In areas like computers, software and movies, we are dominant. And those are the products that affect how people think in the rest of the world.

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American corporations are becoming the global leaders. Of Fortune magazine’s 100 largest companies in the world based on sales, only 24 are American. But in terms of profits, 56 are American. So why should I go out and buy second-rate foreign companies and take all of those currency risks when the best ones are right here?

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Papp America-Abroad Fund

Strategy: Seeks long-term growth by investing in dominant U.S. multinational corporations.

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VITAL STATISTICS

Year-to-date return: +6.1%

1996 return: +27.7

Five-year return, through March 31: +122.7

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Five-year return, avg. growth fund: +87.4

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Five biggest holdings:

1. General Electric

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2. Interpublic Group

3. State Street Boston

4. Manpower

5. Intel

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Max. sales charge: none

Assets: $50 million

Min. investment: $5,000

Phone: (800) 421-4004

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Morningstar risk-adjusted performance rating, 1-5: HHHH

Sources: Lipper Analytical Services, Morningstar. Return figures are through March 31


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