BOSTON (TheStreet) -- Chris Arbuthnot, manager of the John Hancock Global Opportunities Fund (JGPAX) , expects earnings to increase at Sirius XM Radio (SIRI) - Get Sirius XM Holdings, Inc. Report starting next year as the company raises prices and reduces costs.
The five-year-old fund, rated four stars by
, almost doubled last year after losing 51% in 2008. The fund has returned 8.5% annually, on average, during the past three years, beating 99% of competitors.
Fund Manager Five Spot, where America's top mutual fund managers give their best stock picks in five fast and furious questions.
How did the fund manage to rebound so strongly last year?
If you go back and look at the past 11 quarters, we've outperformed in nine of them. There were only two quarters we underperformed and one of those was less than 200 basis points.
A lot of our stocks went down 60% to 80%. But we knew that the market was being irrational and we were able to use that to be opportunistic. We bought into a few stocks that were going down because we knew they were worth much more.
You spend much of a given year travelling abroad. How important is that?
I meet with a lot of companies, I see the assets and I know what the opportunity set is. A manager who is based in London might all of a sudden see Brazil doing well and feel like he is being left behind. So he just goes and buys the big names. I go for the companies that managers who don't get on the ground are not going to gravitate toward. It is a huge competitive advantage.
Why are you so bullish on Brazilian companies, which make up more than 16% of the fund's holdings?
When we look at Brazil, we find a lot of unbelievable investment opportunities. A lot of the names that we own are not going to be the big benchmark names like
. We tend to own names that are leaders in their industry, but not ones that would necessarily be listed on a U.S. exchange.
There is a name that we own in Brazil called
Santos Brasil Participacoes
. They own the largest container terminal in the Port of Santos, which has a huge competitive advantage because it is much closer to Sao Paulo than other competing ports. You can think of it as a toll road that just makes money every time a container comes in and out.
We also have
Companhia de San Basico
, a water utility for San Paolo. This stock was trading at 56 reais (about $30) per share last summer, and then went down to 13, at which point it was trading at two times earnings. I had met with the management team numerous times and I knew there was nothing wrong with the business. I knew it is not going to stay there, and now it is back up to about 38 reais per share.
The fund counts Sirius among its major holdings. Why such optimism about a company many see as troubled?
I don't think the market is giving credit to the company for what the business model is now versus what it was premerger. Premerger, Sirius and XM would compete with each other to sign up talent. They were bidding against each other and it was all about the race to see who could sign up the most subscribers.
As a combined company, they have better bargaining power when contracts come up. Over the next five or six years, as contracts come up for renewal, you should see significantly better terms for Sirius. I don't see the content expenses increasing going forward.
You are also going to see improved revenue sharing agreements. When Sirius and XM were building their businesses, they gave away a lot of the economics to the carmakers, paying a revenue share per month to
. As those contracts come up for renewal, you are going to see better terms.
When we model out the financials going forward, we see a real ramp up in earnings and free cash flow beginning in 2011. Their capital expenses will go down significantly at the beginning of 2012, when they get their next satellites. You've also got pricing. Their core pricing hasn't increased since 2002
aside from a music royalty fee. Regulators said, as part of the merger, you can't raise prices until 2011. We think at that point they will, and it will be pure profit.
What approach do you take when choosing investments?
We tend to put more focus on margin of safety in a business in the emerging markets. What we are really looking for in the emerging markets are monopolies, high market share companies with pricing power and great management teams.
On the developed market side, like the U.S., we are willing to go into more special situations, looking for highly distressed names, where our bottom up fundamental analysis provides an edge in finding opportunities.
-- Reported by Joe Mont in Boston.