10 Questions With International Growth Fund Manager George Greig

Retail investors can hardly make the point more clearly: They are fed up with U.S. companies.

Domestic equity funds have seen nine straight weeks of outflows, with the bulk of the money being redeployed into bond funds. But there's another option: The international markets -- which didn't fly quite as high as U.S. equities -- are also not suffering from the same slump. Plus, international companies don't have nearly the amount of inventory to work through before a rebound can take place. There are still good returns to be had -- you just need to be a little flexible.

Flexibility is the core of the $565 million (WBIGX)William Blair International Growth fund. Manager George Greig chooses fast-growing firms from every corner of the market. Assets are evenly distributed across companies of all sizes, and the portfolio has diverse country weightings that could be as much as 50% more or less than the MSCII index weightings. The fund has outperformed the index by 4.9 percentage points year to date as of July 16, and by 12 percentage points on an annualized basis over the past five years.

Greig launched the fund in 1992 and has managed it consistently since returning in 1996. The fund's five-year annualized return of 8.51% beat 97% of its peers, according to Morningstar.

With such a track record, it should be no surprise that Greig can be a bit of a contrarian. Read on to find out why Greig feels Germany needs reform, how China will change Japan, and why India's a better place to invest than you might think.

1. How has the dollar reaching parity with the euro influenced your buying decisions?

Generally speaking, it's something that we try to ignore. But it becomes a concern with exporters from the euro-zone. A company that's 80% export-based from the euro-zone to "dollar" countries could lose their entire profit margin.

But the falling dollar is less of an issue with exporters from Japan, since a lot of Japanese exports are at least partially sourced in dollar-based, Asian countries. For instance, if Canon(CAJ) [one of Greig's top holdings] is selling a printer or a camera, very little of its components and sub-assembly and materials are really yen-cost based. The stuff is coming from Malaysia or China, which are linked to the dollar, and is being sold in the U.S. So the yen-dollar exchange rate only affects them when they translate currencies for their financial statements. It doesn't actually have an impact on their margins or competitiveness.

World Beater WBIGX has performed significantly better than its foreign stock fund peers over the last few years

Source: Morningstar, *YTD data as of 7/18/02

2. Most international funds hedge to the dollar to prevent their fund's assets from declining if local currencies decline against the dollar. Why don't you?

Generally speaking, we've hedged very little in the past, and we certainly aren't inclined to, now that the long-term trend for the dollar has turned downward. We want exposure to international growth. So if the markets and economies we choose are successful in the long run, those currencies will hold or even appreciate in value. And under those circumstances, we don't want to hedge. And to the extent currency fluctuations become a problem for corporate profits, we're going to count on the companies we invest in to manage that situation.

3. Do you have any concerns about the U.S. economy, from a fund management standpoint?

It would almost have to be an all-or-nothing situation for us to worry: If the U.S. economy were to suffer from a real collapse in consumer confidence and a policy crisis in terms of interest rates and growth management, then I think we'd have a global problem on our hands.

But if the U.S. growth rate slows, the savings rate rises, consumption levels off and capital spending goes into a gradual recovery -- like what is happening now -- generally speaking, those trends favor the international markets, and Asia in particular. Asia will show its credentials to outgrow the U.S. economy over the course of this cycle. Under normal circumstances, a sluggish U.S. economy is an environment we can live with.

Spanning the Globe WBIGX's % weighting by region

Source: Fund Company, Data as of 6/30/02

4. Almost 40% of your fund is in Asia, including more than 10% in Asian emerging markets. What, specifically, is so attractive about the region?

Yes, that's pretty aggressive -- most funds have a much greater exposure to Europe. But Asia looks more dynamic as an end-market. The real problem for Asia, as well as Europe, has been dependence on other economies for end-market growth. In this cycle, though, Asia has demonstrated that it's successfully begun to develop domestic demand sources within the region. That's why Korea grew so well last year, and that's why China has been growing even in face of an export slowdown.

I think we're going to see the same phenomenon in Japan as well, and I think that means Asia can grow strongly in face of weak consumption in the U.S. I'm not so sure that Europe is at the point where they can develop autonomous domestic demand as an economic policy.

At a Glance: George Greig Manager, William Blair International Growth Fund (WBIGX)
Expense Ratio:	1.60%
Managed Since:	7/23/96
1-year return:	-3.87%/ Beats 83% of its peers
5-year return:	9.01%/ Beats 97% of its peers
Top Holdings:	Canon (CJA), Samsung, Halifax Bank of Scotland
Assets:	$565 million
Source: Morningstar, Data as of 7/18/02

5. What sort of economic policies does Europe need to employ before it can match Asia's potential for developing its own end-market?

Consumer confidence has been terrible month after month after month in Germany and Italy, which are the real industrial engines of Europe. The answer involves deregulation of the retail sector, credit decisions by the financial sector to allocate more capital to the household sector and small business, and measures to stimulate housing development and household formation.

They need a framework for creating a more consumer-friendly environment -- keeping stores open longer, permitting more flexible formats of stores and allowing more wage flexibility among workers in the retail and service industry.

6. You recently ramped up your fund's exposure to Japanese stocks. Why?

To some extent, that was a reaction to the spring, when people were writing Japan off. There was a heavy focus at that time on Japan's long-term structural financial problems and people were overlooking the cyclical potential of Japan. When the global economy enters recovery, Japan always does as well.

I also feel strongly that this cycle could be the one in which Japan really gets a lasting recovery. Japan's external relationships with Asia are the driving force now. Its trade and sourcing relationships with Asia are more vigorous now, and as a result, a succession of economic numbers have been better than expected.

7. Does China's growth pose a competitive threat to Japan?

Japanese businesses are now realizing that the relationship they have with China is totally different than the competitive relationship they had with Korea or Taiwan or the U.S. Japan's industrial infrastructure was geared to a "we must compete" [mentality], but the idea of being competitive in an industrial sense with China is just out of the question. It won't happen.

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So that changes the way business people think. They must learn to invest in China as a source of supply, which will lower their own costs and enable them to lower prices and increase consumer demand, both in Japan and in other markets. It's a win-win situation. That's the paradigm that's driving Japan to be a consumption and service-oriented society.

8. Clearly, you're bullish on Asia, and Asian emerging markets make up more than half of your 20% stake in emerging markets. Yet you have less than 5% in Latin America, a region that's often touted for its potential. Why?

Latin America is a different situation [from Asia], as is Eastern Europe. In Latin America, the history of debt and financial mismanagement has led to an extremely high cost of capital. Businesses can't keep up with the treadmill of 18% to 20% interest rates. That headwind is just too much to deal with.

It's going to take a long time and structural change to get South America moving. The majority of my Latin American stake is in Mexico, which is almost not an emerging market, just because it's so integrated into the NAFTA economy.

9. How do politics -- rather than purely economics -- figure into your buying decisions?

One area where politics is particularly important is Germany, and there I'm not very optimistic. The necessary changes will be difficult to achieve -- the parties are too close together, and there's not the external pressure to force change. Germany won't fall into a crisis, but it may fall short of its growth expectations. They need accelerated pension and tax reform, reduced social security contributions, a rebalanced health care system -- things to alter the equation of the cost of doing business.

10. Are there areas in which you'd invest despite some political instability and/or macroeconomic trouble?

We're very favorable on India. Of the 12% we have in emerging Asia, India represents about 4%. It's a good market for this kind of environment. It doesn't tend to be very cyclical; it doesn't depend too much on exports. There's a wide range of listed companies, most of which are very well-run. And the macro problems of India don't really get in the way of corporate development.

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