Jim Moffett logs few miles to invest in foreign companies for his topnotch international fund. MorningstarAdvisor.com
It would be inaccurate to call Jim Moffett old-fashioned. He carries a BlackBerry, reads books on a Kindle, and banters with the hosts on CNBC.
But old-fashioned habits do define Moffett's approach at Scout International
Based in Kansas City, Mo., Moffett has managed Scout International since 1993, after his employer was acquired by United Missouri Bank. UMB was about to launch a mutual fund specializing in foreign stocks. In his words, they looked around for a manager and then said, "Why don't we just let Jim run it?" Moffett wasn't an obvious choice; the bank-trust portfolios he had run focused on domestic stocks. He'd never managed an international fund. But over the years, Moffett--who had a longstanding interest in international affairs--had owned a few foreign companies.
Although one can question the rigor of UMB's search process, the choice proved wise. The fund's 15-year return through the end of November 2009 is one of the best of any broad-based international fund. It has achieved that high return with relatively low volatility. Moffett has twice been named runner-up for Morningstar's International-Stock Manager of the Year award.
Keeping Expectations in Check
It's no surprise that Moffett retains traits from an older time and feels comfortable with a less frenzied pace. He grew up on a farm outside Kansas City and says that experience helped instill patience. It also served to rein in expectations. "Some years, it rains, and it's a good year," he says. But farmers know lean years will come, as well. "So, I never expected stocks to go up in a straight line."
Behind the aw-shucks demeanor lies an inquisitive mind--and a highly educated one. Moffett received a bachelor's degree in history from Harvard, where he wrote his senior thesis on the commercial connections between Britain and Argentina in the early 19th century. He then headed straight to Stanford for an MBA. From there--with an interruption for military duty as a reserve officer, for this was the Vietnam era--he went into investing.
Moffett makes it clear that his career decision owed to interest in the field, not a desire to make the big bucks. "At the time, investment management wasn't as glamorous as it is now," he says. "It wasn't seen as the road to instant wealth, as it is for young people today."
With his Midwestern roots, his passion in investing for investing's sake, and his folksy manner, some might associate Moffett with Warren Buffett. Not so fast. Both use a patient, low-turnover style, but otherwise their approaches have little in common. Most important, Moffett has never been a classic value investor--he has leaned toward growth.
Why would a cautious, farm-raised kid head in that direction? Moffett credits his military experience. He served stateside as a data-processing officer in the Air Force and says that he acquired much more familiarity with computers and other technology than most people of his generation did. It probably didn't hurt that he learned his trade during the mid-to-late 1960s, a period when "go-go growth" strategies, as they were known, were providing eye-catching returns.
That go-go era came to a painful end. And the fact that Moffett also had to deal with the dreadful 1973-74 bear market reinforced the knowledge gained from his farming background: Tough times are part of the package, and markets inevitably move in cycles. Successful investing, therefore, requires patience and a long-term view.
An Unorthodox Approach
When he started running Scout International in 1993, Moffett says, the fund was a "sideline" to his main job managing bank-trust accounts. No analysts were assigned to him or the fund, so he says that he "drafted the expertise" of the in-house analysts researching U.S. firms, "trying to get them to think outside the borders." Left essentially on his own, Moffett coped in the early days by limiting the portfolio to about 40 stocks and focusing only on companies whose shares traded in New York as ADRs.
Not until 2000 did the firm start building a team specifically for the international fund, and the process went slowly. It now totals seven: three managers and three analysts in addition to Moffett. One of the current analysts had been among those "drafted" by Moffett way back at Scout's inception. A more-recent addition came from Morningstar's equity-research team. The entire group meets once or twice a week, and Moffett says that while he's responsible for pulling the trigger on buys and sells, he generally looks for a consensus among his team and doesn't often overrule it.
Moffett says that it hasn't been hard to attract good analysts and managers to Kansas City. Hires tend to be self-selecting, he says, with most having roots in the area. Nor is the location as much of a handicap as one might think in attracting company visits. Moffett says plenty of firms come through town to meet with his firm as well as the teams at American Century and Waddell & Reed.
Although his analysts now travel overseas, Moffett says that they're more likely to attend conferences where they can meet executives from many firms at once rather than making the company-by-company visits typical of most fund shops. Moffett has never traveled much for research purposes--a rarity among international-fund managers. He says that he simply doesn't find visits productive. When he asks company officials about their business, he says, "everything's always coming up roses."
Does he find Wall Street research, with its well-documented shortcomings, more useful? Moffett is one of the few investors these days who will say that he does. "Most Wall Street analysts know their companies," he says. "They know what the best companies in their industry are." In his view, the key is to take advantage of that knowledge while ignoring the brokerage houses' price targets and buy/sell/hold recommendations. "Price targets are a marketing gimmick," he says. "They give an air of precision to a business that's not precise."
No Gear Head
Moffett notes that such recommendations derive from short-term prospects, and that's anathema to him. His long-term view is borne out by Scout International's turnover rate. The 2009 figure of just 16% is typical throughout the fund's history. In 1999, the height of the day-trading frenzy, Moffett didn't catch the fever; the fund's turnover rate that year was 8%. Yet the fund still gained 31%, 4 points more than the MSCI EAFE Index. (The average turnover rate for a foreign large-blend or foreign large-growth fund is nearly 100% per year.)
As befits a history major, Moffett is more interested in a company's story than the detailed numerical analysis beloved by many financial professionals. Although he certainly takes a company's financials--and valuations-- into account, he concedes that he's "not a gear head or a quant." He's more attuned to what's driving a company, the industry, and the economy.
He differs from the pack in other respects, by both paying attention to the benchmark index weightings and being willing to differ sharply with them. Most fund managers either try to stay close to the weightings or, in the case of stubborn individualists like Longleaf Partners or Third Avenue, completely ignore them. Moffett thinks that having a well-diversified portfolio is important to reduce volatility and also serves as a check in case he makes a mistake in judgment. The portfolio is well balanced, with healthy allocations to most sectors and regions.
Yet he's been willing to differ drastically with index weightings. Currently, for example, the two top countries in the MSCI EAFE Index--by far--are Japan and the United Kingdom; each has a 20%-21% weighting. While many managers underweight Japan, and some the U.K., few go as far as Moffett, who currently has just half of the index weightings in each market. And rather than wondering if he should raise that Japan stake to move closer to the index, Moffett says that he recently discussed with his colleagues why they even have as much as they do. He says that it's tough to find the kind of growth prospects he likes in Japan.
Still Fun After All These Years
A manager who has been running portfolios since the 1960s provides a level of reassurance that advisors prize. On the flip side, it inevitably raises a question as well: How long will he continue to manage this fund?
Moffett says that he's not looking to get out anytime soon. "There's no timetable," he says. "This is a great business. Most of the time it's fun." He adds that a patient investor such as himself even welcomes the challenge of a rough market environment, hoping he can locate the opportunities unearthed by the tumult. When pressed for an estimate of his future tenure, he says that he plans to stick around "at least several years," and then adds with a laugh that he's been saying "several years" for several years now.
It's a legitimate question, though. After all, although he's got an able and experienced team, none of his colleagues has Moffett's lengthy record as a sole manager of an international fund. His comanager on Scout International, Gary Anderson, has been working with Moffett since 2000, and Michael Stack, the comanager on a newer small/mid-cap fund, Scout International Discovery
At least advisors don't have to worry about one thing: Unlike some investors, for this veteran manager, the wear and tear of a grueling travel schedule won't force him to hang up his BlackBerry any sooner than he otherwise would choose.
Gregg Wolper is a senior analyst with Morningstar.
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