Foreign Fund Concentrates on Best Bets

Russ Wiles is a mutual fund columnist for The Times

John Horseman was reaping big gains in foreign stocks when most of his peers weren't. He runs the $2.1-billion GAM International Fund, a foreign-stock portfolio that boasts an impressive 25% average annual gain over the last five years--a time when many markets outside the U.S. were supposed to be out of favor.

The success of GAM International can be attributed largely to the strictly focused--if somewhat idiosyncratic--approach followed by Horseman, who prefers to make big bets on a relatively small number of investment themes.

In making decisions, he and his London-based staff at Global Asset Management, a Bermuda-based investment firm that manages $11 billion in assets worldwide, first consider a region's economic picture, then narrow the field to a small number of favorable countries and industries. They then look for big companies selling at attractive valuations. And while the fund is usually invested in stocks, Horseman also has the leeway to switch assets into bonds or other investments.

Horseman, 40, is a London native who earned a bachelor's degree in economics and politics at the University of Birmingham. He broke into the money-management business in 1982 at NatWest Securities, then worked briefly at Bank of America Investment Management before joining GAM as a portfolio manager in its Hong Kong office in 1987.

Horseman, who has been managing GAM International and its smaller sibling, the $85-million GAM Global fund, since 1990, was interviewed by Russ Wiles, a mutual fund columnist for The Times.


Times: GAM International ranks among a select few foreign funds in good performance in recent years. What's behind your numbers?

Horseman: One important aspect is having a focus, running a narrowly defined portfolio. There are 20-odd large international stock markets in which we can invest, and countless smaller ones. In theory, we could put upward of 8,000 stocks into the fund. Yet we hold on average only about 50 stocks. . . . Careful screening allows us to hone in on those opportunities that we think are particularly attractive.


Times: Your total returns have generally been excellent, but there have been times when you've bounced from a superb year to a slightly subpar one, at least compared with international-fund benchmarks.

Horseman: [Because] we run a concentrated fund, it will fluctuate [more widely] against the averages. We don't personally pay a lot of attention to where we rank. We just try to keep earning attractive returns.


Times: So your investors don't get anything resembling an index fund?

Horseman: No. During the 1990s, the [Morgan Stanley Capital International] Europe, Far East and Australia Index has been compounding at about 8%. If we had been a widely diversified and bland offering, we'd have that sort of performance.


Times: How do you screen stocks?

Horseman: We do it on three levels. First, we look at countries. We eliminate those that are hostile to investing, especially in terms of high interest rates that don't look likely to fall imminently. Economic climate, thus, is the starting point.

After we have honed in on countries where we think interest rates are favorable and the economy looks OK, we start thinking about the industries we like. Do we want smokestack industries, growth industries or interest-rate-sensitive businesses? We're quite happy to maintain a high concentration in industries that look good, while avoiding others. Finally, we look at individual stocks, favoring those with high growth potential and selling at attractive valuations.


Times: Which industries look good or bad at the moment?

Horseman: In Europe, where we have three-quarters of our money, we have a very low exposure to economically sensitive industries such as chemicals, autos, engineering and paper. Instead, we have high weightings in drugs, publishing, mobile telephony and other growth businesses, for which there are some excellent European companies.


Times: Do you view yourself more as a growth manager or a value stock picker?

Horseman: It's fair to say we are both. For example, we have fairly high weightings in financial stocks--namely, European banking stocks. These typically sell at modest price-earnings ratios and are thought of as value stocks. But we [also] own drug companies, which are very growth-oriented.


Times: What's an example of a company that epitomizes what you're looking for?

Horseman: National Express. It's the principal rail operator in the United Kingdom, the largest operator of commuter-train services. This is a regulated, predictable business, for which there's stable demand.

National Express underwent a long period in state ownership, so it has been rather rundown in terms of its investments. But we see a company with a clean balance sheet and one that has the opportunity to put money into the business and generate high returns from that investment. It's a company that, in a low-inflation world of predictable costs, can perform extremely well. Its earnings are growing by about 15% a year.


Times: What are some other favorites?

Horseman: One is Hong Kong Gas, the gas utility. Many of Asia's better companies have been sold down because of the generally bad climate. Hong Kong Gas is the monopoly supplier of gas to households, restaurants and other businesses in Hong Kong.

It also has a growing business in China, laying a gas-pipeline network in some of the southern Chinese cities and delivering gas supplies. Its main competitor is the bottled-gas business, but bottled gas comes with a lot of disadvantages. Hong Kong Gas is unregulated because it's deemed to be in a competitive position with bottled gas, so it's unusual in that respect. And it has grown earnings at about 20% a year throughout the '80s and '90s. Also, it sells inexpensively, at about 18 times earnings.

Other stocks we especially like are Bank of Scotland and Barclays Bank, both of which are major holdings. The macroeconomic picture for banking shows good loan growth, widening interest-rate margins, strong fee growth from the cross-selling of non-bank products and an improving cost picture.

As for Bank of Scotland and Barclays Bank in particular, both are moving from a cash- and check-based system to a credit- and debit-card system, especially in the United Kingdom. This allows them to turn what had been a cost--the processing of cash and checks--into income in the form of annual fees or interest-rate charges from merchants and clients.


Times: Your assessment of Europe must be favorable if you have three-quarters of the fund's money there.

Horseman: Yes. . . . You have low interest rates and inflation, so the European bond markets are favorable. The strong dollar also has been a plus for many European companies with large business activities in the U.S. A strong dollar enhances their earnings prospects.

Also, the productivity of European companies is generally improving. They maybe aren't pursuing huge restructuring programs of the kind that have become common in America, but they are producing more with a static head count. . . .

Finally, the commodity picture for all companies is very benign. Stable costs are important for companies to produce profitably.


Times: What about Asia?

Horseman: We got out of the Asian markets in the early part of 1994. We had big involvements prior to that but felt there were some hostile signs creeping into the picture. In particular, the economies were heating up to such an extent that inflation was coming in.

These countries were running big current-account deficits [a key measure of trade balances], which always make us nervous. . . . So we sold our holdings, which provided the seed money for [investing more in] Europe. We haven't been heavily involved in Asia since then, although we do have about 4% of our money in Hong Kong, in a bank and in [Hong Kong Gas].


Times: With 75% of the fund's money in Europe and 4% in Hong Kong, where's the rest?

Horseman: In Japan, in trade-related stocks, primarily in electronics companies and auto makers. These are the exporters. However, we haven't gotten involved in Japanese stocks geared to the domestic economy because we still think it will remain troubled.


Times: Do you think the yen will weaken further against the dollar?

Horseman: Yes, although Japan is steadily building up its trade surplus again, which is a mitigating factor.


Times: Do you normally venture into emerging markets?

Horseman: In theory we can. But we're not doing that now. We're finding better values elsewhere. And we realize that if we buy a big multinational, such as a drug company like Roche in Europe, we are implicitly gaining exposure to the smaller markets. The companies we own derive 14% of their earnings, on average, from emerging markets.


Times: Morningstar, the fund tracker, describes your fund as somewhat amorphous in that you can move money into different types of assets and markets. Is that a fair description?

Horseman: I think there's an element of truth there, in that the fund can have a big involvement in bond markets. To that extent, it's a bit different from many other funds that confine themselves to stocks.

Between 1992 and 1996 we had fairly large positions in European bonds at times. We recognized that interest rates were very high. We felt they were attractive at a time when European corporate earnings were stark. But in other respects the fund isn't hugely different from others, although we also hedge currencies, which is something that many other funds don't do.


Times: Some international fund managers say hedging often isn't worth the trouble and cost.

Horseman: It depends on what you're trying to do. We're not trying to trade in currencies. We have no expertise in short-term timing. . . . If we buy a stock in France, for example, [we consider] whether the one-year outlook for the franc is reasonable given where French interest rates are and similar factors. If we feel the currency is likely to weaken, we'll hedge. We view it as a risk-reducing exercise, not one for speculation.


Times: You also run the GAM Global Fund, which invests in U.S. securities as well as foreign ones. What's your take on the attractiveness of U.S. stocks compared with foreign ones?

Horseman: We have a very favorable view of the American financial markets. Our Global fund currently has roughly 60% of its money in the U.S. In airlines, we like Delta and US Airways, both of which have very favorable earnings pictures. In drugs and health care, we like Medtronic and Schering-Plough. In financials, First Union, NationsBank and Chase Manhattan all are long-term holdings.


GAM International and GAM Global

Strategies: The International fund seeks capital appreciation mainly by investing in a concentrated selection of foreign stocks; the fund also can shift heavily into bonds. The Global fund follows a similar strategy and can invest more than half its assets in U.S. securities.


Year-to-date returns:

GAM International: +14.6%

GAM Global: +11.2%

Avg. intl. hybrid fund: +7.9%


Five-year annualized returns:

GAM International: +25.0%

GAM Global: +25.3%

Avg. intl. hybrid fund: +10.9%


GAM International, five biggest holdings as of Feb. 28: 1. Barclays 2. Bank of Scotland

3. Novartis 4. Roche Holdings 5. Nestle


GAM Global, five biggest holdings as of Feb. 28: 1. Merrill Lynch 2. US Airways

3. Microsoft 4. Novartis 5. Intel


Assets: GAM International, $2.1 billion; GAM Global, $85 million


Max. sales charge, either fund: 5%


Min. investment, either fund: $5,000 ($2,000 for IRA)


Phone: (800) 426-4685


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

GAM International, *****; GAM Global, *****

Source: Morningstar

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