Combing the Continent
Bankers Trust might not yet be a household name in mutual funds, but the company’s International Equity Fund has a record that’s worth writing home about. The fund, which made its debut in August 1992, ranks among the top 2% of foreign-stock funds over the last five years with an average annualized gain of 20.36%.
Lead managers Michael Levy and Robert Reiner seek out undervalued stocks of growth companies based in developed foreign economies, especially those of Western Europe. The fund has 80% of its assets in Europe, with a particularly high 26% stake in France. Less than 10% of the fund’s assets are in emerging markets. Co-manager Julie Wang, who grew up in Taiwan, has responsibility for this slice of the portfolio.
Levy, now 50, joined New York-based Bankers Trust in 1993 after working as a money manager at Oppenheimer & Co. Reiner joined Bankers Trust in 1994 after stints at Standard & Poor’s, Sanford Bernstein and Scudder, Stevens & Clark. Wang, 33, joined the firm in 1994 after earning an MBA from the Wharton School at the University of Pennsylvania. All told, the team manages $4.5 billion in assets, including the International Equity Fund.
All three managers recently talked to Russ Wiles, a mutual fund writer for The Times.
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Times: Describe your basic strategy.
Reiner: Our approach is “growth at a reasonable price,” a philosophy that brings together both value and growth aspects. A lot of pure value investors buy cheap stocks without really knowing what will make them rise. Also, many growth investors buy stocks that have increased earnings at an above-average rate, without considering what will allow that to continue. We look for catalysts in both areas.
Times: Are you taking a bottom-up approach, in which you focus on individual stock research, or a top-down strategy, based on broad economic and market trends?
Levy: A combination of the two, but dominated by the bottom-up approach. About 70% of our time involves researching companies.
Times: Where do you weigh in regarding emerging versus developed markets?
Levy: We view the fund as a diversified international core holding for investors. As such, we tend to be a bit conservative in our investments, restricting our holdings to no more than 15% in emerging markets. Right now, we’re even lower, around 4%. But that’s partly because Portugal, which represents about 6% of the portfolio, recently was reclassified as a developed market. In general, we’re not enthusiastic about opportunities in emerging markets.
Times: That must reflect a pessimistic view on Asia.
Levy: It’s the Scarlet “A.” We gradually sold many Asian stocks last year because we couldn’t justify the prices at which they were trading. We reduced what at the beginning of the year was a 20% position in the Pacific region, excluding Japan, to 10% by the fall. So we lost money like other funds, but not much. Our overall exposure is much lower now. We think Asia will need years--not months--to work through its problems. There are so many problems that this will be a “U-shaped” recovery, not a “V-shaped” one. And the base of the “U” could be quite long.
Reiner: A lot of people got faked out earlier this year, in January and February, when Asian stocks made a nice upward move. Some markets gained 30% to 40% in a short time, but on very little liquidity and volume, on the view that the International Monetary Fund sanctions will be a plus. Certainly, in the long haul, they will be. But in the near term, they will be painful. Even if the IMF sanctions work, we’re still talking about negative earnings for some time, along with economies that won’t support strong growth. So it’s hard to get bullish in Asia.
Times: Are there any emerging markets you’re excited about?
Wang: Recently there has been a lot of turmoil in Eastern Europe. In some places, like Hungary, we think it’s been overdone. Hungary recently had a change in government, and some people worry the new government will be against privatization and reforms. But the new government has toned down the rhetoric since the election. We own one stock in Hungary and are looking to add more.
We also like Greece, which is stable and a full member of the European Community, with the government determined to join in [the] European Monetary Union by 2001. We’re looking to add stocks in Greece.
We also are looking for opportunities on a selective basis even in Asia. We recently picked up a stock in Korea, for example. But our focus is on Eastern Europe.
Times: What catalysts would you like to see before investing more heavily in Asia?
Wang: There are so many factors hitting the region right now, it’s hard to name a few. But one main thing would involve Japan getting its economy back in order to provide an engine of growth for the region. When Mexico had its economic crisis a few years ago, the country had an engine of growth in the U.S. . . . China is another concern, especially with the possibility of devaluation if GDP [gross domestic product] growth dips. I don’t think China will devalue because all that would do is spark another round of competitive devaluations across the region. But China has to get its economy on track, and they are trying to do the right thing by increasing infrastructure development.
Times: Will Japan turn around soon?
Reiner: It’s becoming a perennial basket case. The Japanese economy is in recession now, and despite major efforts to pump up the economy, it isn’t working. The weaker yen should provide a better environment for exporters, but the Japanese have been bombarded not just by their own domestic crisis but by the situation in Asia. We have a very low weighting in Japan.
Times: So where are you seeing value these days?
Levy: In Europe. We feel there’s good economic and earnings momentum. The core countries are finally beginning to show signs of a sustainable, domestic-driven economic revival. And we’ve seen strong GDP growth with controlled inflation in peripheral countries like Portugal, Spain, Finland and Ireland. We’re also seeing a tremendous pickup in Italy, which is benefiting from decreasing interest rates and low inflation. France is our biggest bet. We are finding an array of exciting companies in which to invest. . . . France is our largest position in the portfolio, while the peripheral markets also count heavily.
Times: A lot of Americans view France as a bastion of socialism, as seen in the recent move to a 35-hour workweek.
Levy: There’s a lot of disinformation about France, which stems mainly from the Anglo press. The U.S. picks up on what’s broadcast out of London, and unfortunately a lot of French-bashing goes on.
Consider the 35-hour workweek: It’s as much in the interest of employers as employees. With the legal workweek reduced from 39 to 35 hours, it means employers only need to pay workers for 35 hours. There was never any suggestion that they be paid one centime more than they’re currently paid for 35 hours of output. The only thing that changes is overtime, which means employers must pay 25% more for those four additional hours.
On the other hand, if companies now are free to employ more people, they will receive significant cost concessions. It’s really amazing how this has been misunderstood as being something that’s outlandishly against capital and in favor of labor, when in fact it’s an even draw. The purpose was to get the two sides talking to generate some supply-side reforms and labor flexibility. We’re impressed by the progress that the French and even the Italians have made in terms of legislation that allows share buybacks and option programs to give incentives to management.
Times: What are some French companies that you like?
Levy: One is Suez Lyonnaise. It has become a very focused utility, with a strong position in the water sector. The company [a conglomerate] is restructuring and divesting non-core holdings, creating shareholder value in the process. Another company we like, one of our largest holdings, is Societe General d’Enterprises, a construction group with a low cost base. It’s very well positioned to take advantage of the economic upturn in France. There’s a clear catalyst at work in terms of the recovery that’s taking place. In addition, several major French financial service companies either are driving or benefiting from the consolidation that’s begun in that industries. Such companies include AXA-UAP, BNP [Banque Nationale de Paris] and Paribas.
Reiner: The auto company Renault is another example. Renault is going through a major restructuring to reduce some of its platforms while identifying new markets in Europe and abroad. Throughout Europe but especially in France, the auto industry has been able to take advantage of cost-reduction efforts. Much of the restructuring that we saw in the U.S. in the late ‘80s and early ‘90s is now in the early stages in Europe. Companies are spinning off non-core assets and reducing head counts.
A lot of the consolidation now going on is being driven by the fact that Europeans, starting Jan. 1, will be operating in a single interest rate and currency environment. So if you’re a German auto company and it’s cheaper to set up a plant in Spain because property and labor costs are cheaper, you will be more apt to do that now that you’re dealing with the same currency and interest rate scheme. We expect to see a lot more cross-border merger-and-acquisition activity, with French firms buying German or Italian firms, for example.
Times: There’s plenty of skepticism about monetary union. Do you think it will prove fruitful?
Levy: Absolutely. This is a transformation and even a revolution of the European landscape. The countries involved are surrendering the sovereignty of their currencies--something that won’t be easily undone. It will be a catalyst in achieving economic union and, one step further, a quasi-political union. It will shake up a lot of the rigidities that have been in place in Europe. Corporations are making changes in anticipation of a new environment, where the barriers to competition are fading. There will be losers in this game, but there will be winners, too. And those that win will win big.
Times: What about Britain, which has the largest European stock market?
Reiner: The U.K. looks a lot like the U.S. Both countries have enjoyed a very long economic-expansion phase but now are dealing with inflationary and interest rate pressures. France has been the best-performing core European market for the year to date, while Britain has been the worst.
Times: You mentioned several French stocks. Any companies in other nations that you really like at the moment?
Reiner: Adidas-Salomon in Germany. It’s being added to the [leading German stock market] DAX-30 index, so it’s a timely pick. It’s a situation where a dynamic individual--Chairman Robert Louis-Dreyfus--came in and transformed a beleaguered shoe company that had been a big player in the 1970s before ceding the market to Nike, Reebok and other competitors. Essentially, he came in and reinvented the company. He streamlined operations, redesigned the shoe offerings and put money into marketing to foster a positive image and relaunch a quality brand name. Then he expanded the lineup by buying Solomon, a French ski company, and by moving into apparel.
Levy: Our largest position is in Credito Italiano. Early on, we identified this as a company that’s forward-thinking in terms of understanding the banking challenges that lie ahead in an environment of monetary union. It has become necessary to consolidate the Italian banking sector, and Credito is paving the way.
Management has tremendous experience and understands the importance of creating value for shareholders and being sensitive to the wishes of minority shareholders. They’ve broken with past traditions of being beholden to core shareholders or minority shareholders who exerted influence--a practice that went on in Europe and Japan fairly routinely. So it’s a very innovative company that just engineered a merger with another bank. With the combination, management is beginning to show an ability to generate a 20%-plus return on equity.
Reiner: Credito Italiano also will benefit from the equity excitement that’s happening in Europe. Historically, Europeans, except for people in Britain and Holland, haven’t owned much in the way of stocks. They’ve preferred bonds, which paid nice double-digit returns, especially in places like Italy and Spain.
That’s not going to happen now because interest rates are converging down to German levels. Also, as governments stop contributing to pension plans in an effort to force individuals to fund their own pensions, people will have to move more toward equities. We’re seeing the first signs of that now, much as the U.S. developed an equity culture over the last several years. It’s just starting in Europe, which implies greater liquidity and demand for European stocks, and a more supportive environment for stocks to do well.
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Russ Wiles is based in Phoenix. He can be reached by e-mail at russ.wiles@pni.com.
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BT Investment International Equity Fund
Strategy: Seeks capital appreciation by investing in foreign companies, primarily those based in developed nations.
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VITAL STATISTICS
For periods through May 31
12-month return: +30.84%
12 month return, avg. foreign fund: +13.96
3-year annualized return: +23.50
3-year annualized return, avg. foreign fund: +12.86
5-year annualized return: +20.36
5-year annualized return, avg. foreign fund: +11.89
Five biggest holdings as of May 31:
1. Credito Italiano (Italy) 2. Societe General d’Enterprises (France) 3. Telecel-Comunicacoes (Portugal) 4. Renault (France) 5. Newcourt Credit Group (Canada)
Sales charge: None: Assets: $1.1 billion
Min. investment: $2,500 ($1,000 for IRA) Phone: (800) 730-1313
Morningstar risk-adjusted performance rating, 1-5: *****
Source: Morningstar Inc.
