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How Did a Big Foreign Fund's Experiment Pan Out?

Checking on Julius Baer's attempt to mimic its stellar giant fund with a sequel.

Gregg Wolper, 08/29/2006

In May 2005, Julius Baer closed its highly successful, rapidly growing Julius Baer International Equity BJBIX and opened a new, similar fund the same day. At the time, we were critical of the firm's decision to name the new fund Julius Baer International Equity II JETAX. That name implied that the new offering was a clone fund, which it isn't: It is prohibited from owning stocks with market caps lower than $2.5 billion. And we didn't see why the firm couldn't have waited a bit before coming out with the new fund. Better to have allowed the big fund more time to digest its rapid growth and see how much money continued to flow in after the closing. But we thought the idea reasonable in other respects.

However, we realized at the time that answers to broader questions could only be supplied later. Most importantly, it wasn't clear that the new fund would be able to truly simulate the portfolio and strategy of the original--which was stated as the intention by manager Rudolph-Riad Younes--and to supply the same excellent level of performance.

Now, it has been a bit more than a year since the managers put the new fund's portfolio fully in place and since that offering started attracting meaningful assets. So it's time to take a look and assess the results so far.

The checkup is well worth the effort: Not only is the original fund one of the most prominent international funds around, with more than a decade of success and more than $18 billion in assets, but the new one has itself attracted more than $2 billion in assets already. (And the managers run another $20 billion or so in private and institutional accounts.) Moreover, Neuberger Berman recently took a nearly identical step, closing its fine all-cap international offering NBISX, while opening a similar fund with the same market-cap limitation as Julius Baer International Equity II. It's possible other shops with a single, all-cap international fund that's gaining assets rapidly might also have such a plan under consideration.

The Portfolios
Younes and comanager Richard Pell faced a challenge with the new fund, for they said they would create a portfolio that matched the original's very closely. In the mid- and large-cap arenas, that meant they would hold the exact same stocks as much as possible. Regarding the smaller ones prohibited to the new fund, they planned to own stocks as similar as could be, thus keeping the same sector and country proportions.

That's not as easy as it sounds. Some of Younes' most innovative and successful plays are on uncommon stocks such as midsized Scandinavian firms that he likes partly for their exposure to the Baltic countries and Russia, or Turkish banks ripe for takeovers. Finding close facsimiles of that sort of stock isn't quite as simple as substituting one giant multinational bank for another.

The good news is that the funds do indeed show an impressive amount of similarity. The top holdings--both the household names and the lesser-known ones--are similar and are held in similarly modest proportions. (No stock in either portfolio gets as much as 2% of assets, a tack the managers have long taken to reduce company-specific risks.) And the country weightings for the uncommon destinations such as Turkey, Russia, and Poland have been nearly identical since the latter stages of 2005 as well. That's critical, because such markets have been favorites of these managers--and of few others--and have played a large role in the original fund's success.

Sector weightings are also similar, with the numbers generally within one percentage point of one another, or two for the biggest ones. Sometimes the figures are actually identical.PAGEBREAK

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