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By Kevin McDevitt, CFA | 06-09-2011 02:13 PM

Indirect Plays on Emerging Markets

PIMCO EqS Pathfinder manager Anne Gudefin says the fund tends to find more value in some of the multinationals listed in the developed world--like Danone, Pernod Ricard, and Carlsberg--with strong prospects in emerging markets.

Kevin McDevitt: Hi, I'm Kevin McDevitt for Morningstar. We're here at the Morningstar Conference, and we're being joined today by Anne Gudefin from PIMCO.

Anne, thank you for joining us.

Anne Gudefin: Kevin, thank you for having me.

McDevitt: Anne is the portfolio manager on PIMCO Pathfinder. Anne has been with the fund since April of 2010, but before that you were, of course, with Mutual Series for a number of years.

I want to jump right in and just ask you a few questions about your portfolio and your positioning. One of the things I find interesting is you don't have a lot of direct emerging-markets exposure in the portfolio, but it seems like you do have a fair number of indirect plays. Could you talk about some of the ways you are getting that indirect exposure to emerging markets?

Gudefin: It's correct. We prefer to have indirect plays because we are value investors; we have strict value criteria, so we tend to find more value in some of the multinationals listed in the developed world, and we also care about corporate governance, and corporate governance is definitely better in the developed world.

So, for instance the way we play emerging market is through a company listed in Copenhagen, Denmark, called Carlsberg. They have over 50% of their earnings just coming from Russia, and 10%-plus also coming from Asia. But if we focus on Russia, they own Baltika, which is the main brewer in Russia, and the good thing about having a brewer in Russia is that you benefit directly from what the government is trying to do. You have a major problem in Russia in the sense of demographics. The population is declining, and one big reason for that is life expectancy is declining, especially for men. It went from 65 to 55 years. Why? Because people are drinking too much vodka, so the government is taxing very heavily vodka, which has benefit impact on the consumption of beer, and you know that's a simple idea, but it works, and that's what we like in the fund.

McDevitt: And ... there are other companies out there too that are getting ... a large percentage of their revenues from emerging markets. Are there any other examples along those lines?

Gudefin: Sure there are a plenty of them. We own a company like Danone ... 100% of their products are healthy, and they also have 50% of their EBIT coming from emerging markets, Russia, China and so on. There are plenty of [others]. We own Pernod Ricard, which is major beneficiary of consumption of Scotch whiskey and cognac in China for instance.

McDevitt: One of the things I think sets your fund apart and is very different about your approach is, in addition to just owning equities, you also will own distressed debt in your fund, and you also have taken advantage of merger arbitrage in the past. And with M&A activity picking up in recent months, recent quarters, I am wondering if you've found more merger-arbitration opportunities out there, and if you may give a few examples of those.

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