Ketterer: Values Already Harder to Find

Gregg Wolper: Hello, I'm Gregg Wolper, Morningstar mutual fund analyst, and I'm here at the Morningstar Investment Conference with Sarah Ketterer, who is the co-manager and also co-founder of Causeway International Value Fund. Sarah, two months ago managers were telling us that there were opportunities everywhere. In early March, prices had fallen tremendously, and we just heard about the opportunities all over the world. Now it's the end of May, prices have risen a lot--are the opportunities still out there or is it tougher to find them?

Sarah Ketterer: A bit tougher, Gregg, because as of March 9, everything was buyable. We had such major dislocation globally, in every market, that you could have thrown darts. What we did instead of darts, however, was to put a lot of cyclicality, safe cyclicality, in our fund, in our institutional accounts. So identify companies with especially strong balance sheets who would benefit from a rising economy, and then those stocks have done extremely well. There is still upside, but it's not nearly as abundant as it was.

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Wolper: Are there specific sectors that those opportunities were concentrated in?

Ketterer: I'd say we would find opportunities across all the cyclical areas as well as some of the financials like insurance companies. So plenty of opportunities, I'd say especially in areas such as the industrials. Our fund has about 21% of its total in industrial stocks, which is well above any index weight.

Wolper: Now you mentioned insurance, and I know that that's a favorite area of yours. Sometimes when people hear that a fund has a financials weighting, they get scared that it's all in some of the troubled banks. But in your case, you like insurance--can you tell us why you like insurance and maybe some of the names that are your favorites?

Ketterer: Well, you're right, we do like insurance, and we don't like troubled banks, that's an easy one. But the insurance stocks, the life insurers with their large investment portfolios, give us a chance to put beta or market sensitivity into the fund during a bear market. So when we think the markets are so bombed out and are at such low valuation, they really only have one trajectory and that's upward, then we can add some of this market sensitivity. And the beauty of these life insurers overseas is they are better capitalized than their U.S. peers on average, much safer investment portfolios.

So with a life insurer abroad like an AXA or an Aviva in the U.K., you get this portfolio of corporate bonds, generally very high grade, very little in the way of structured debt, and then you get property and equities and a whole variety of investments, all of which we think are underpriced and likely to appreciate over the next few years.