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Three Macro Themes Inside Vanguard International Growth

Schroders' Virginie Maisonneuve expects volatility in the macro data, but sees longer-term opportunity in the emerging markets supercycle, demographic shifts, and climate change.

Three Macro Themes Inside Vanguard International Growth

Courtney Dobrow: Hello. My name is Courtney Dobrow and I am a Mutual Fund Analyst here at Morningstar. With me today is Virginie Maisonneuve, Portfolio Manager with Schroder Investment Management, Sub-Advisor for Vanguard International Growth, which is a top short and long-term trailing performance record.

Virginie, thank you for joining me today.

Virginie Maisonneuve: Thank you.

Dobrow: Why don't we start with a little bit about your investment approach? I know that you look for quality growth companies at good valuations. Can you tell me a little bit about how you think about quality and what you are looking for?

Maisonneuve: So, first, quality is not only a financial strength, but it's also related to management track record as well as corporate governance. We pay a lot of attention to those three factors. We meet with every company before it gets in the portfolio, and clearly, once it is in the portfolio, we meet them at least every six months if not every quarter.

Dobrow: We've seen a lot this year about troubles in the euro zone, maybe improving a little bit, slowing growth in China, continued concerns about U.S. growth. How do all of these factors influence the decisions that you are making in the portfolio?

Maisonneuve: So, the macroeconomic and thematic environment is the third point in our philosophy. The first point is buying quality growth companies at a reasonable price for sustainable competitive advantage. The second one is a very strong focus on fundamental research at the stock level. However, at a certain point, it is picking stocks within this coherent macroeconomic and thematic roadmap. That roadmap has an impact on the earnings growth of the companies that we are looking at.

When I think of the next 12 to 18 months, I see continued volatility. Volatility doesn't have to be negative because it can give us some fantastic price, buying opportunity, but we have to be aware that the macro data will continue to be volatile. I see in the U.S. a jobless recovery, I think things in Europe are a little bit better at this point and I see continued growth from the emerging markets, particularly out of China, India and Brazil.

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Dobrow: So in terms of how you are thinking about the portfolio, maybe broadly speaking, what kinds of changes have you made recently or are you sticking with kind of where you've been?

Maisonneuve: We've had – sort of the three themes that we have are supercycle, demographics and climate change. Supercyle is the role of the large emerging markets' economy on to the global economy, and that has an impact not only on the emerging markets stocks, but clearly, also on listed companies anywhere in the world who can sell into that growth.

I think that, in general, we have seen a continued trend for us. There hasn't been a shift. We've always liked that growth. In addition, what we've seen year-to-date is an increase of industrial stocks, particularly in Europe, in the international portfolios as the weakness of the euro has given some competitive edge to some of the companies, but also as orders from the machinery and capital goods out of China and India, for example, have continued to be very strong.

In addition, we still like the energy sector, particularly with the gas companies, as well as with the engineering companies that will be feeding into the heightened security check or I would say process following the BP spill that will shape the industry going forward.

Dobrow: Within some of the other themes that underlay the portfolio, demographics, climate change, within those broad areas, what sectors or industries are looking attractive and also are there some examples of holdings that you can provide?

Maisonneuve: So in demographics, for example, the key there is to understand that the changes that are happening are shaping the power of the consumer spending around the world, and there's definitely a big shift. Because the population is going from about 7 billion to 9 billion in 2050 and because 98% of the growth comes from emerging market countries, there is a very strong shift in consumer power as the West is mending itself from over-leverage to those countries.

So, clearly, demographics is not only understanding how large staples companies are dividing their earnings, but it can also be pharmaceutical companies, it can be financial companies, it is really broad based.

In terms of climate change, again, it's understanding how climate change is really about national safety and it's all about global leadership with regards to fossil energy as demand, given the strength of the emerging market world and the growth on a relative basis, becomes more and more important. The demand from those countries is very strong and the fossil fuel supply will not be able to follow up with that demand.

So, clearly, understanding how the gap will be bridged if it's not by a very, very strong oil price is essential particularly to the developed world because the developed world has a lower trend growth, and therefore, will be less able to finance those higher energy prices.

So, I think for us it's understanding that gas companies, for example, have a lot of potential. Gas prices are pretty low and we see gas as a very clean source of energy. But it's also understanding how building materials company, transportation companies, particularly cars that are strong in the hybrid area and potentially in the electric area, all of those factors help us understand the world of tomorrow. Again, climate change is about leadership and the availability to energy at a cheap level.

Dobrow: Thank you very much for being with us today, Virginie. I am Courtney Dobrow with Morningstar.

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