Many financial experts have been saying that Americans should keep their money at home. As the performance of foreign stocks becomes more highly correlated to that of Wall Street, so the argument goes, overseas investments do not offer much diversification.
Richard Pell, co-manager of the US$550 million Julius Baer International Equity fund, says such views are shortsighted.
"The correlations between US and foreign investments are cyclical in part," he said, adding that "companies with local revenue sources or restructuring opportunities" do not move in lock step with the Standard & Poor's 500-stock index.
The fund's performance appears to bolster his position. It has returned 10.6 percent a year, on average, for the three years ended on Thursday, compared with 0.4 percent for its foreign stock peers and 4 percent for the S& P 500, according to Morningstar Inc.
Pell, 46, and his co-manager, Rudolph-Riad Younes, who is in his late 30s, are based in Manhattan and work for the fund's adviser, Julius Baer Investment Management, a unit of the Julius Baer Group of Zurich. They buy a diversified portfolio of foreign stocks of all sizes. Their investment strategy depends on where they invest.
"In Europe and the developed markets, we're sector-driven, bottom-up investors," Pell said. "We pay very little attention to the macroeconomic and the political environment. In the emerging markets, it's the other way around." In Japan, they use a hybrid approach.
They aim to reduce risk by limiting their investment in any single company they consider particularly risky to 0.25 percent of assets, and to 2 percent for companies with solid growth prospects.
The fund's sector and geographic allocations generally stay within 5 to 10 percent of those of their benchmark, the Morgan Stanley Capital International Europe Australasia Far East index.
Emerging-markets investments are now 7 percent of assets and are never more than 20 percent, the managers say.
Younes says the managers are bullish on Central Europe, especially Poland, Hungary and the Czech Republic, which are negotiating to join the European Union and European Monetary Union over the next several years. "This means that the euro will replace their local currency," he said, "and their long-term interest rates will be more in line with rates in the developed markets."
In developed markets, the managers aim to buy companies that can return 15 to 20 percent a year over the next two to three years. They look for companies that are market leaders, are gaining market share, are restructuring or are taking other steps to improve profitability.
In May, the managers added shares of Muenchener Re, a German insurer. The company will benefit from pension and tax law reforms scheduled for 2002, Younes said, which will increase the demand for savings products. He added that it should also benefit from a new law that will let banks and insurance companies sell domestic stock holdings tax-free; it can then reinvest the proceeds in its core business. Shares sell for 1.4 times price-to-book value, adjusted for unrealized gains, he said. He expects that ratio to increase to 2 in the next two years.
The managers first bought shares in March 2000 at 296.88 euros; the stock now trades at 324.06 euros.
Another favorite is Bank Pekao of Poland. It is a market leader in brokerage services and total deposits. Shares trade for just 1.6 times book value; he expects the multiple to reach 4 or 5 in the next five years.
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