A Trio of Picks from Some of Our Favorite Foreign Fund Managers
Foreign and global managers uncover picks in aggregates, finance, and software.
At Morningstar, some of our most interesting conversations are with fund managers about their recent picks. You may learn something about a company you've never heard of, or maybe get a new perspective on a company you thought you already knew.
Talking stocks with managers is also interesting because it offers insight into the mutual fund itself--the thought process that drives the research, the discipline behind the buy and sell decisions, and the creativity involved in seeing an angle that the market as a whole may be missing.
To close out International Investing Week, we reached out to some of our analysts' favorite foreign and global fund managers, asking for a recent stock pick and, in their own words, how the pick reflects the strategy behind the portfolio they run. We've published their responses, and a bit about each of their funds, below.
David Herro | Oakmark International (OAKIX)
From Morningstar's Analyst Report: Analyst Pick Oakmark International, run by Morningstar's International-Stock Manager of the Decade David Herro, often displays a contrarian style. Herro has a longer holding period for stocks than many of his peers--the fund's annual turnover has been less than 50% for six of the past 10 years. That's part of what's given him the courage to buy things that others are selling. Herro invests in stocks that trade at discounts of at least 40% to his estimates of intrinsic value. He also considers emerging-markets and smaller-cap names, and the fund's sector and country weightings often look quite different from its peers'.
Recent Stock Pick (submitted by David Herro): We've used share price weakness associated with EU sovereign credit risk fears to add Banco Santander to our portfolio. This is a classic example of investing in a well-run, well-capitalized, profitable and geographically diverse organization whose share price has been caught up in macroeconomic concerns--in this case, Spain's challenging economic outlook.
Despite its Spanish listing, Spain and Portugal only represent a little over 25% of Santander's group profits, while Latin America generates 40% and the UK operation almost 20%. The U.S., Germany and other countries are included in the remainder.
As a traditional bank focused on retail and commercial lending, Santander has three key strengths.
First, the group uses internally developed information technology to increase per-branch revenue and productivity through effective cross-selling. This increases Santander's return on assets and makes it one of the world's most profitable banks.
Second, its acquisitions are well-timed, well-priced and strategically sound. By building 10%+ local market shares, Santander benefits from strong economies of scale, and its local market knowledge provides better control of credit risk.
Third, Santander is one of the best capitalized banks globally, with a core Tier 1 ratio of 8.5% in the third quarter of 2010, and it has a low-risk commercial banking business model.
Our bottom-up research process and long-term investment time horizon allow us to measure how Santander's profitability will likely evolve over the next few years. This gives us the confidence to look through the current cyclical credit crisis at some of Santander's economies.
At today's prices, Santander trades at 1.3x 2011's estimated tangible book value, less than 8x next year's estimated earnings and it has a 7% dividend yield. This is for a bank that will generate a low-teens return on tangible equity this year and a low 20% return under normal conditions.
Fears about Spain's sovereign debt and rising funding costs have pushed Santander's share price down by close to 25% year-to-date. But Spain is not Greece--its gross debt is expected to peak at 74% of GDP versus Greece at greater than 120%, and it has a modern history of good fiscal stewardship.
David Samra | Artisan International Value Fund (ARTKX)
From Morningstar's Analyst Report: David Samra--who, along with co-manager Dan O'Keefe, was named Morningstar's International-Stock Manager of the Year for 2008--looks for stocks that trade at least 30% below the team's estimates of their intrinsic worth. The team generates ideas using screens that search for stocks with features such as low P/E ratios and high returns on capital. Management then researches these ideas further, with about 40-50 stocks making the final list. The fund's atypical look means its returns are often out of step with both the index and its category. But its good years have far outweighed the bad ones: It's outpaced every one of its category peers since its 2002 inception.
Recent Stock Pick (submitted by David Samra):HeidelbergCement is the world's largest aggregates supplier and the world's fourth largest cement company. It owns world-class assets across a number of markets in Europe, Asia and North America. Aggregates, though cyclical, is a great business, and a necessary ingredient in many building products that cannot be substituted. Substantial aggregate reserves are in limited supply, and it is very difficult to bring on new quarries because of environmental and population constraints. Aggregates are also very expensive to transport, so most owners of aggregate mines face little competition. All of these characteristics lead to tremendous pricing power. Cement is also a very good business, particularly if it operates within a consolidated and rational market. Heidelberg tends to have very high market shares within its markets, which gives it good pricing power.
The last few years have been difficult for Heidelberg. As the recession hit in 2007 and 2008, construction activity plunged. Volumes of cement and aggregates were down double digits in many of the company's markets. In addition, Heidelberg went into the recession with a highly leveraged balance sheet. It was forced to refinance its debt and raise equity in order to stabilize its financial condition. As a result, the valuation became depressed.
In Heidelberg, we see an opportunity to buy world-class assets, at or near a cyclical trough, and at a very cheap valuation. We believe that the business has earnings power of more than five euros per share. Given our entry price of EUR36, the valuation is very attractive.
Manning & Napier World Opportunities
From Morningstar's Analyst Report: Unlike most rivals, which anchor on one style and size of stock, this team makes the most of a flexible, all-cap approach. The group targets cyclical, steady growth and value stocks, marrying bottom-up analysis with macroeconomic checks. That's a lot of rope, but the team doesn't hang itself. It has a record of successfully targeting the correct type of stocks and the right rungs on the market-cap ladder at a given time. Its trailing returns land in the category's top decile in every trailing period of one year or more and it has topped its rivals and the MSCI EAFE Index in eight of the past 10 years.
Recent Pick (submitted by Manning & Napier):Amdocs is a leading global provider of billing and customer relationship management (CRM) software and services to telecommunications service providers worldwide. Manning & Napier Fund, Inc.* holds Amdocs in the World Opportunities Series under Manning & Napier Advisors, Inc.'s Strategic Profile strategy, which seeks to identify secular growth companies with sustainable competitive advantages that enable them to gain market share.
Targeting the world's 300 largest telecom carriers, Amdocs' solutions address the increased billing and customer care complexity resulting from new services and services/content bundling. Amdocs also helps carriers cut costs and improve operational efficiency through billing platform consolidation, managed services, and outsourcing. Accordingly, we see Amdocs as a key beneficiary of several trends in the telecom industry that should provide multi-year tailwinds for Amdocs' products and services, including:
By virtue of its modular yet comprehensive product and service platform, focused research and development budget, and years of experience and successful implementations of several complex IT transformations, Amdocs is considered by many in the industry to be the best independent telecom billing and CRM solutions provider. This reputation is supported by the fact that the company has never lost a customer in its history, and has gained share over the long-term despite charging a premium for its solutions. Switching costs are also formidable as Amdocs' systems become ingrained in the fabric of subscriber care and service.
Following the recent CEO change and subsequent fiscal 2011 guidance that projects a short-term hit to operating margins as the company makes several workforce and customer-centric investments, we believe Amdocs' stock offers compelling risk-reward relative to the long-term growth opportunity we foresee. Manning & Napier believes the current share price ignores the fact that Amdocs serves a large, fragmented addressable market against less focused competition. In addition, penetration of Amdocs' targeted customer base is low, and approximately 40% of service providers still rely on increasingly inefficient homegrown systems to service their subscribers. Furthermore, Amdocs is leveraging its strengths into new adjacent markets (i.e. cable & satellite, carrier content services, operational support systems that help manage the service experience and the network itself). We believe the current valuation of Amdocs does not reflect its potential revenue growth.
This summary is for informational purposes only.
*The Manning & Napier Fund, Inc. is managed by Manning & Napier Advisors, Inc. Manning & Napier Investor Services, Inc., an affiliate of Manning & Napier Advisors, Inc., is the distributor of the Fund shares.
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