You’re not invested in high-growth emerging markets like China and Latin America. Why?
We’re value investors, so we don’t necessarily chase high-growth stocks. We also don’t like the types of companies in the Chinese stock market. They require a lot of capital and always carry the risk of government intervention. Last year, the Chinese government put caps on gasoline prices, which resulted in PetroChina losing money even as oil prices hit record highs. And when you’re investing in companies in Latin America, you have to worry that the company may be run in the interests of the managers and other insiders, not the shareholders. Quite a few countries there have also been seduced by populist-type politicians, so you also have political risk.
But inflows to emerging-markets funds and exchange-traded funds have been accelerating. What’s the allure?
Stocks in emerging markets became cheap late last year and early this year. And, in many cases, they had less debt than their peers in the U.S. and Europe. The bad news is that they’ve already bounced back a lot. And if the world economy is as slow as we think it will be for the next three to five years, these kinds of markets — which are largely manufacturers and commodity producers — will suffer. Exports will be hurt.
Are emerging markets the next bubble?
I would not call it a bubble, but one has to be very disciplined about valuations when investing there.
You have a lot of your funds’ money in cash — 17 percent of assets in Worldwide and 18 percent in International. Are foreign stocks too expensive?
Values are close but not as appealing as we’d like them to be, so we’re in a bit of a “wait and see” on the equity side. We like to have the ammunition to pounce if valuations become more compelling.
Japan accounts for the largest single-country allocation in both of your funds. Why?
We think Japan has a shot at posting the best equity returns over the next several years. Last year, the Japanese stock market fell more than 40 percent, so we’re paying very little for companies there with very strong finances. We’re also finding companies that have lots of cash, which allows them to maintain dividends, buy back shares, or acquire competitors. We really like Temp Holdings, a staffing company. Other favorites are Astellas Pharma, which recently bought back shares, and Fanuc (FANUY), which makes robotics for many U.S. and Japanese electronics and auto manufacturers.
Where else do you see strong returns overseas?
The regions that are likely to bounce back the quickest should be those with the least household debt. Aside from China, which is already recovering a bit, that means India, Taiwan, and, hopefully, Japan.
What are a few of your favorite stocks for 2009?
Sodexo (SDXAY), a catering company based in France. Also, Nestle (NSRGY), the Swiss-based food company, and Thai Beverage (TBVPF), the premier liquor and beer company in Thailand. The political situation in Thailand is unnerving but not dangerous. Secom (SOMLY), Japan’s largest security company, is also a favorite.
You currently have 8 percent in gold bullion. What’s the case for owning gold?
We view it as an insurance policy against deflation. Conversely, if inflation comes back because the government has thrown too much money at the crisis, that could also be positive for gold. Longer term, we believe the dollar will become a weaker currency, yet there are very few possible candidates for replacing the dollar. So people will consider gold as the ultimate hedge.
Why not own gold stocks?
Gold was up 5 percent last year, while gold-mining stocks were down 35 percent. Yet that does not make gold stocks cheap enough.
The Worldwide Fund has 32 percent in fixed income. Do you see the best international returns for 2009 coming from bonds?
Yes. Fixed income has provided good returns so far this year, and high-yield bonds can capture equity-like returns. In the long run, equities typically provide returns of 8 or 9 percent. So when bonds are able to deliver those kinds of returns, with a small risk of default, we are intrigued.
International investing didn’t offer U.S. investors much protection last year when most foreign markets were hit harder than ours. What lesson can investors learn from this?
The U.S. is the bellwether market, so when it falls a lot, you can expect that foreign markets will, too. But the foreign markets with less household indebtedness should be able to stop moving in lockstep with the U.S. markets.
More on MoneyWatch:
