Foreign Bent

L.A. Times Archives

July 29, 1997 12 AM PT

No matter how you slice it, T. Rowe Price International Stock Fund rates among the giants of foreign investing. This Anglo-American joint venture consistently has placed in the top quartile of international funds for various periods dating back to its founding in 1980.

Over the decade ended June 30, for example, the fund’s total return of 165% eclipsed that of the average international stock fund by 28 percentage points. T. Rowe Price International Stock also weighs in as one of the oldest and largest international funds.

Martin Wade, a 54-year-old Englishman, has been at the fund’s helm since the beginning. He serves as chief investment officer, guiding a team of 10 portfolio managers scattered around the globe.

Wade works for Rowe Price-Fleming International, a venture between T. Rowe Price Associates of Baltimore and Robert Fleming Holdings of London.

Russ Wiles, a writer specializing in mutual funds for The Times, interviewed Wade during a recent stop in London.

Times: As the chief investment officer of an international fund, you must be a bit frustrated having watched the U.S. stock market outperform the rest of the world throughout the 1990s. But so far in 1997, the relative performance has been fairly close. Do you think the cycle finally might be tipping in favor of foreign markets?

Wade: If we had this conversation a year ago, I’d have said it was time for international stocks to outperform the U.S., and I would have been completely wrong. It just shows how difficult it is to predict major changes, which is why we tend not to make big shifts.

Having said that, the fundamentals on which I made that judgment have not changed. U.S. stocks have performed outstandingly well for 2 1/2 years. . . . [The market] has been driven in part by interest rates. Rates fell when the rally started and they have stabilized since then. We also have seen better-than-expected growth in corporate earnings.

Aside from these factors, we have had a demographic shift whereby people in their 40s and 50s have been putting more money into equities to provide for their own retirements. They perceive stocks as safe, not bank deposits, because their [bank] returns will be eaten away by inflation. The rally has been fueled by money. The demographic factor explains where it has been coming from.

Times: Do you think these factors will continue to bolster U.S. stock prices?

Wade: I can’t see U.S. interest rates getting much better. An even bigger disappointment might come from companies being unable to keep growing their earnings as fast as they have. There’s a limit to what these downsizings and cost-cuttings can accomplish. So I think corporate earnings will decelerate, which will bring into sharp focus just how highly valued the [U.S.] market is.

Times: How about international markets?

Wade: In foreign markets, we’re seeing improvements in interest rates and corporate earnings, plus perhaps the early stages of a demographics-driven investing trend, at least in Europe. People are starting to think more about equities for their futures, rather than bank deposits or government bonds. To a certain extent, this sentiment explains the good performance of the U.K. market of late.

In the Far East, there’s potential for good stock market performance as well, particularly now that the Japanese economy has started to grow again.

I don’t think the U.S. market will collapse. Rather, I see it backing and filling.

Times: As chief investment officer for T. Rowe Price International Stock, you are orchestrating the movements of 10 managers based in several countries. How does the team concept operate?

Wade: We believe that all of these foreign markets are segmented, that they behave differently. So we spend most of our time looking at individual companies and trying to understand management, the strategies of these companies and where they’re positioned in the marketplace.

Since we’re investing in more than 40 countries outside the U.S., we have to break up that challenge into small, manageable pieces. Each manager has discretion to make individual-stock decisions against a macroeconomic background on which we have agreed as a group. About half of our managers are based here in London and about half in other countries.

Times: And all are evaluating stocks using a similar philosophy?

Wade: Yes. We’re looking for growth at a reasonable price. We want to find attractive stocks trading at sufficiently low multiples of earnings or free cash flow.

Times: Are you mostly focusing on the larger, more prominent foreign companies based in developed nations?

Wade: Not entirely. This fund is designed to capture the whole range of international investments. . . . For example, emerging markets weigh in at about 13% of the fund’s assets.

Times: What are some of the regions or countries that you like at the moment?

Wade: The fund currently has about 53% of its assets in the stock markets of Europe, with the balance in the Pacific region and the Americas.

Europe is mired in difficulties related to economic and monetary union [in 1999], and the major economies are dead in the water. But we still can find a lot of growth opportunities in Europe, which has a number of true international leaders, like Royal Dutch Shell.

Also, stock valuations in Europe are quite reasonable--certainly not as high as in Japan--and in many ways the growth is more predictable than in Southeast Asia. We have to look beyond what’s immediately happening in Europe, with the struggling economies, to see what the vision is. The European Community already is well-integrated as a marketplace, and trade is increasing with the Eastern European countries. They increase the potential of Europe and give us some additional stock markets to look at in the future.

Times: Is there a danger of European Monetary Union unraveling?

Wade: I believe it will happen . . . [but] if it fell apart, the visionaries would be disappointed but each of these economies would be stimulated [by government spending] quite strongly. That in turn would provide a good background for equity investments.

Times: Many investment experts seem to characterize Europe as being five or 10 years behind the U.S. in terms of recognizing shareholder values or adopting pro-shareholder policies.

Wade: Yes. The U.S. has been through an important transition relating to falling interest rates, superb earnings growth and recognition of shareholder values, of which downsizing, restructuring and share buybacks all have played a part . . . That’s only beginning in Europe.

Times: Will European companies act more like U.S. companies?

Wade: Yes. Five years ago, the management of Bayer, the major pharmaceutical company, would see analysts only at a single meeting in Germany, and even then management would answer only certain questions. Now they visit places like London and are very open. You can find many examples like this.

Times: Outside of Britain, stock ownership among individuals in other European countries seems quite low. Do you see that increasing over time?

Wade: Yes. That’s another driving force for these markets . . . Most continental Europeans still deposit their money in banks. When stock ownership got going in the U.S., in the 1950s and 1960s, you could see the effect on the market. It’s very plausible that that has started in Europe.

Times: Among your fund’s holdings, which stocks exemplify what you look for?

Wade: In Europe, we like several companies in the specialty printing-publishing niche, which is potentially a huge growth area because it’s tied in with electronic publishing, accounting, taxes and so on. Favored holdings in this business include Wolters Kluwer and Elsevier, both listed on the Dutch stock market.

Another industry to which we have good exposure is pharmaceuticals. SmithKline Beecham is one of the fund’s largest holdings, as is Glaxo Wellcome, which now ranks as one of the top three drug companies in the world. The firm has very high research and development spending, which has proven very productive. It also has powerful distribution, which puts it in a position to do deals with others. For example, Glaxo Wellcome has the U.K. rights for Resulin, the new Warner-Lambert medication for diabetes that has excited investors in the U.S.

Yet another example is Novartis, a Swiss company that resulted from the merger between Sandoz and Ciba-Geigy. It’s about where Glaxo Wellcome was a few years ago, with a lot of potential for synergy.

Times: What’s your outlook on Asia, where many stock markets have been depressed this year?

Wade: Southeast Asia has been frustrating because it has been a situation of almost profitless prosperity . . . but miracles can go wrong, as is happening now in Thailand and Korea.

Also, we have learned that it can be hard to find stocks that are natural participants in the growth of these economies. Singapore, for example, has a large mix of banks and shipping-repair firms. Some are quite cyclical and don’t really reflect the broad economy. Also, a lot of these companies are owned by or heavily influenced by a controlling family. They often shuffle assets around in a way that hurts public shareholders.

Times: You used to live in Hong Kong. What’s your view of that part of Asia now that Hong Kong has returned to China?

Wade: I was there from 1970 to 1974. Despite all of the hoopla and headlines, the affected parties have been preparing for this for a long time . . . It’s crucial for China to maintain a prosperous, dynamic and capitalist Hong Kong, because what the Chinese really want is Taiwan. If the Chinese mishandle Hong Kong, it will blow their chances of ever bringing Taiwan back.

Times: Any favorite Hong Kong stocks?

Wade: We like Hutchison Whampoa, a major trading house with interests in real estate, consumer products and shipping/container terminals. It’s the closest thing to that elusive aspect, companies offering a play on a country’s big picture.

Times: Japan is the fund’s largest individual holding, although your position there is relatively light compared with Japan’s weighting in the leading foreign stock-market indexes.

Wade: We’re under-weighted primarily because we don’t own Japanese financial companies, which make up a large part of any Japanese index. Japanese banks are in trouble . . .

[We] are finding better values among Japan’s multinational companies, many of which are high-growth firms.

Times: Such as?

Wade: We have big holdings in Sony and Canon. These companies are still producing attractive consumer electronics, and they’re still making a lot of money.

Also, Japan’s retailing business, which has been very old-fashioned, is being rejuvenated by new players like Ito-Yokado, a supermarket company.

Times: Given your lack of excitement about Asia, are you looking at Latin America?

Wade: I am. We have about 8% of the fund’s assets in Latin America, with the bulk of that in Brazil and Mexico. They have the better-established markets and they’re further along in the reform process than places like Argentina and Chile.

Political reforms, better profitability and privatizations all are part of the big picture in Latin America, where we tend to favor big, blue-chip utilities like Telebras [the Brazilian telephone giant] because they are cheap, with tremendous potential.

Telmex [the Mexican phone company] was our first play in Latin America, back in the late 1980s, and it was a huge winner . . . That heartens us.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

T. Rowe Price International Stock Fund

Strategy: Seeks capital appreciation by investing in foreign stocks selling at reasonable valuations. The fund primarily sticks with the larger markets of Western Europe and Japan but has modest holdings in developing economies.

VITAL STATISTICS

Year-to-date total return: +14.1%

YTD total ret., avg. intl. stock fund: +15.0

5-year total return, through June 30: +89.1

5-year total ret., avg. intl. fund: +79.8

10-year total return, through June 30: +164.6

10-year total ret., avg. intl. fund: +136.5

Five biggest holdings as of June 30: 1. Royal Dutch Petroleum 2. SmithKline Beecham 3. Telebras 4. Wolters Kluwer 5. Elsevier

Sales charge: none

Assets: $10.3 billion

Min. investment: $2,500

Phone: (800) 638-5660