Dodge & Cox's Charles Pohl and Diana Strandberg on the secular trends and richer valuations in developing markets, plus finding opportunity in Japan.
Dan Culloton: Are you seeing more opportunities overseas or domestically right now? If you were to look at the global-fund portfolio, you would say, oh, Dodge & Cox certainly must be finding some more opportunities overseas because it's about 60/40 overseas to domestic. Wondering if you would speak to that.
Diana Strandberg: Where we end up on a geographic basis is, really, entirely the result of individual, bottom-up decisions. And if we think about our mix of where we're outside the U.S. or inside the U.S., we'd really have to go industry-by-industry and company-by-company. I think that we see very, very attractive opportunities, both in the U.S. and outside the U.S., in health care, technology, and media. The universes are a little bit different. So you're able to, for example, outside the U.S., invest in companies that have very extensive reach into the developing world, in addition to having some companies that are directly domiciled in the developing world as well.
Culloton: The international fund and the global fund have a significant stake in the emerging markets. And even in the domestic fund, a lot of the companies there have exposure by doing business in emerging markets. Does it make sense to have that much exposure to emerging markets, given the way those markets have rallied in 2009?
Strandberg: When we think about where we want to be owners of a company, we're looking at the individual company and weighing its valuation against what we believe are the future earnings and cash-flow prospects of that business. We want to own businesses that we believe are being run for the long-term owner. And it happens to be that we own companies in Germany and Japan, and 23 companies in the international fund in the developing world. That's entirely a result of individual, bottom-up decisions. So valuation will drive us there.
<TRANSCRIPT>
When we think about growth opportunities, we think there are many very attractive what I'll call underpinnings to the global economic engine coming from the developing world: rising wealth, increasing infrastructure, higher GDP growth would be some examples.
And where we can find individual businesses, wherever they're domiciled, that are able to participate in what we consider that very attractive growth opportunity, we want to own them, whether they're domiciled in the U.S., Europe, or happen to be domiciled in the developing world.
Charles Pohl: But we have to find those at a reasonable price. We think there's clearly a long-term, secular trend going on in terms of growth in income in a lot of these emerging markets, a lot of these people moving from subsistence agriculture into becoming participants in the global economy, change in the political and economic systems in a lot of these countries from state socialism to a more market-based economy. Those things are going to go on for a long time, and there's a lot of opportunity that that creates. Our task is to find people that have good business franchises that can profit from that and then try to buy those franchises at a reasonable price. It's become a little harder in the last year, with the runups in some of those markets.
It's a little more challenging on a valuation point of view. But we're still finding some interesting opportunities, and we've got to look for that because that's a major area, I think, of growth over the next 20 years or so.
Culloton: One area, internationally, that's been a disappointment to a lot of investors for a long, long time is Japan. I'm wondering if you're seeing any opportunities there or any prospects that the value opportunities that a lot of people see there are not, once again, value traps.
Strandberg: We are. We think we are identifying a large number of what we consider to be very attractive, long-term investment opportunities in Japan. Our task is, when we think about valuation in Japan, you can buy companies--you can buy with, let's say a yen of investment, large amounts of revenues and assets and equity.
When you look at profitability metrics, the valuation measures aren't always as compelling, because profit margins are typically quite a bit lower in Japanese companies than their global peers. And capital allocation is typically, how shall we say, more oriented towards holding cash, or more oriented towards other metrics than return-on-capital types of measures.
So when we think about where we're finding opportunities in Japan on a bottom-up basis, what bubbles up in our portfolio is that we have about two-thirds of our Japan weighting in the international fund in companies that are globally competitive. These are companies that are capably managed, they're earning money, and they're very inexpensive. And we think that there are a number of those very attractive opportunities.
Where we continue to look but haven't had success finding the marriage of that valuation and the long-term fundamentals--strength of franchise, attentiveness to the long-term owner, wanting to make money--are what we call in the rest of the market in Japan. We continue to look intensively, but so far we're not finding as much that we think has those two factors.
Culloton: Diana and Charles, thank you very much for your time.
Strandberg: Thank you.
Pohl: Thank you.
