Putting Cash to Work Overseas

Karin Anderson: Hi, I'm Karin Anderson, a mutual fund analyst here at Morningstar. I'm here with Clas Olsson, international equity manager at AIM. He runs funds including international growth, European growth, and global growth.

Hi, Clas, thanks for being here.

Clas Olsson: Thank you.

Anderson: Maybe you can talk to us a little bit today about the cash stakes in the funds that you run. Last year during the market downturn, you weren't finding so many opportunities, kind of found more reasons to sell stocks than buy stocks. Maybe you can just give us a picture for where the funds sit now. Right now, for example, the foreign large-growth fund has about 13% in cash, whereas the Europe fund as about 6%.

With that, maybe you can just talk about why those stakes got to be as large as they did, and also where you're finding opportunities now.

Olsson: Sure. The reason why we started to see the cash balances go up in most of our funds was quite simply going back to late '06 into '07, that we thought a lot of valuations started getting full. We've had a couple of years of very strong market returns.

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And then in addition to that, the return profile for most companies, when we looked at their operating margins and return on equities, were at record levels. And the expectations were for them to go a lot higher. We didn't think that was a cautious, reasonable assumption to make, so we started to pare back some of the weights. We sold some selected names in emerging markets back in '07. And in general, we saw more of a selling environment for us than adding to names in portfolios.

And then as we worked into '08, it was pretty clear that we were in a fully fledged financial crisis. As such, we also thought that would have an effect on general business environments, not only just in the U.S. and in Western Europe, but probably spread around the globe.

Again, expectations were pretty high, so that cash we started to see grow in our funds. We just didn't feel comfortable putting that to work. And then going into this year, we have put some of that to work.

You mentioned the European Growth Fund is down to about 6%. And especially in the small-cap area, is where we think there's a lot of opportunities, a lot of stock shares that were sold, that were force-sold. A lot of investors just wanted to get out from that space, and creating interesting opportunities. And then in international growth, it's gone down from about 15% to 13%, so not quite as much.

And looking in hindsight on this strong rally, maybe we wish we'd put some more of that cash to work than we did. But we think we're going to find more opportunities as the year goes along.

Anderson: OK. Maybe we could touch on financials of a minute. Actually the underweight in financial across the board for these funds. Maybe you could tell us a little bit about why your team has stayed away from them, and what you're going to be looking for with your financials holdings in the future, since you are a pretty long-term-focused investor.

Olsson: Sure. The financials was clearly an area that helped us during 2008, being underweight in general. And being away from some of the worst-hit areas. For example, we didn't have exposure to the U.K. financials and so forth. So that was clearly a plus for us.

As we came into this year, we still found an issue with capital ratios being a big question mark. And we struggled to determine exactly how much potential capital they might need to raise in addition to what was being raised throughout this year.

So we thought there was a decent chance that we were still going to get more diluted. Clearly valuations started to get very low. But from an earnings standpoint, what would be a normalized earnings power going forward, we think was very hard to determine because of a number of factors. Some of those were more structural, the fact that they're being required to lower their leverage on their balance sheets and so forth.

And as such, we've been quite cautious. The other effect that comes through right now, of course, is just the general credit cycle. And having very, very low credit losses coming into this time period. We expect to see a pick-up in the credit losses, and that has started to happen in some of the markets, but clearly it looks to be at a pretty early stage.

We would look for more of that to come through. Looking more like a normal cycle. And then we think maybe that's an environment we'd feel a little bit more comfortable putting more money to work.

Anderson: All right. Thanks very much for your time today.

Olsson: Thank you.