Hey international-minded investors, are you looking for a good mutual fund?
Actually, let's rephrase that: Hey nonmarket-timing international-minded investors, are you looking for a good mutual fund? You might want to take a gander at the
Polaris Global Value fund -- one of the top global performers of the past five years.
The $29 million Global Value fund has plenty to offer most investors. The tenured manager, Bernie Horn, has a keen eye for spotting undervalued stocks both at home and abroad (unlike international funds, global funds may also dip in to the U.S.). An impressive record of returns: The three-year average annual return of 14.8% ranks in the top 1% of all global funds and the five-year average return of 10.4% ranks in the top 9% of all peers, according to Morningstar.
The only folks Polaris Global Value may not be good for are short-term traders looking to time global funds -- the Al Capones to Eliot Spitzer's Eliot Ness. Horn, whose family has substantial investments in the fund, keeps timers out with a redemption fee and an investment style -- slow, deep-value focused -- that doesn't offer the short-term pop timers crave.
However, the fund has done just fine by its long-term investors, and one guesses the $29 million fund will draw some new long-term recruits. The fund's expense ratio runs a bit high at 1.75%, but it's below the category average 1.89%.
In today's column, Horn takes us around the world in 10 Questions, weighing in on a host of topics -- why he likes Japan, how the collision of Eastern- and Western-style capitalism may hurt the Ciscos of the world, what stocks he's buying and selling and why market-timers don't like his fund.
1. What's the philosophy of the Global Value fund, and how should investors use it in their overall portfolios?
The overall mission is to provide a very well-diversified global portfolio that should serve as a core part of someone's investment strategy. That's the overall product position.
The philosophy is a deep-value philosophy that should, in theory, do well in down markets and perhaps not as well in an aggressively fast-moving growth market. If you look at the performance over the past three and five years, it has in fact delivered the promised. Over three years the fund has been up about 10%, while its index and peers have been down 10%.
2. You've been putting more money to work in Japan recently, which has done very well this year. Is this recovery for real? Are the best opportunities among the large-cap stocks or the smaller companies?
We just recently starting putting money in Japan. We have outperformed without it -- the fund is up 38% so far this year -- and we just started investing in Japan in the last few weeks.
We've been a bit more cautious. There's an awful lot of hope that the Japanese economy is turning around in an aggressive way. Our research -- in talking with companies there -- indicates that we should have more modest expectations about the strength.
However, there are some fairly large companies that look very good to us, and we have been making some investments. We've put money in two utilities, including
Tokyo Electric Power
, and a steel company that looks very undervalued to us.
Do any of the companies list American depositary shares on the New York Stock Exchange?
3. How are valuations in overseas markets compared to the U.S.?
Valuations are much more favorable, as a result of the U.S. outperforming everything on the planet the last 10 years. (Laughs.) The U.S. market is very stretched, and this year's rally hasn't helped -- although international equity markets have actually outperformed the U.S. this year.
We think valuations are more attractive than here in the U.S., and by the U.S. I'm referring in large part to large-cap U.S. stocks and now tech stocks. We've made some pretty good decisions reducing our tech because valuations have gotten ahead of themselves. We have found some terrific buys.
One of the secrets of our success is buying stocks that offer very good downside protection. We seek to avoid companies with a lot of potential to go down, and so we sell off some things that have done very well that could easily go back.
What specifically looks pricey in tech?
The chip sector, and the chip-packaging sector. We sold off a little of
Editor's note: Amkor is a low-margin semiconductor-packaging company. We made a good decision back when the stock bottomed out at $2.50 -- we loaded up on it. Then we wound up holding it and it's done so well
the stock closed at $19.48 Friday and is up more than 300% this year. It's a great company and we like it a lot, but it's gotten pricey.
is still a very good buy, as is its sister
We also have done well with
ASM Pacific Technology
. They sell the shovels and picks to high-tech factories in China and Asia -- testing machines, a broad array of back-end equipment. There have been a lot of new factories in China as U.S. companies move, and ASM and Amkor have been selling the stuff. We really capitalized on that process. We've pared back a little bit -- we think it's a great business, but we try to be dispassionate.
4. You say overseas markets look cheap compared to the U.S. Are they not at risk, however, if the U.S. market heads south?
Despite the idea that we have a global market now, it doesn't mean that all markets are moving in lock step and are closely correlated. Over the past 25 years, correlation has been remarkably stable -- and you do get a diversification effect.
Having said that, there are some shorter-term market movements that are related. When there's a crisis or a selloff, there's a ripple effect. But after the ripple, the normal low correlations tend to prevail.
Take oil as an example. When prices go way up, the U.S. gets hurt because it's an importer; Norway or Australia tend to benefit because they are net exporters. That's a classic low correlation. Likewise, the U.S. manufacturing job losses have favored India and China. This trend offers another reason why investors should try to hedge the loss of human capital in the U.S. by diversifying abroad.
5. There's been talk about looking at overseas more from a sector-by-sector basis than a regional basis. Do you agree, and if so, what are the sectors that look good to you?
We do partially agree. It's always been the case that investors should be looking at industries, but the country effect has been diminished a bit because of the adoptions of the European Community. Those countries tend to be a little more integrated -- it has reduced the emphasis to focus on France or Italy or Germany.
But we're still seeing a lack of progress in the restructuring and management of Europe's economy, which means there are still distinctions worth nothing from an asset-allocation standpoint.
6. You have discussed how Eastern and Western capitalism are on a collision course. What does that mean, and how will it alter the investing landscape?
We know we're losing jobs to China. One way of protecting oneself is investing in Chinese companies and benefiting from the growth of these companies. The problem is in China the investor doesn't necessarily rank high on the order of cash-flow distribution.
In Western capitalism, the shareholder has a right to that cash flow. In China and elsewhere in developing countries, companies are government owned or owned by the military and a general's cousin may run the business. It's a complex investment process. It's a problem from a global investor's point of view.
But the collision problem also affects investors from a non-Asian perspective. Let's say you want to invest in
. And you have
( COMS) striking up a relationship with
, the Cisco of China.
Huawei is a private company with a stated intention to displace Cisco as king of the router market. That's the collision course. You've got a great company like Cisco that's got a very high valuation, and it's going to have shrinking margins. Huawei can make irrational decisions about pricing because they don't have to care about shareholders. This is a very big concern for investors, whether you're committed to investing only in the U.S. or global. Navigating this collision will be very difficult.
Cisco sued 3Com over this partnership, and they dropped the suit. Huawei made specific products that Cisco accused them of blatantly copying. So there's the intellectual-property issue as well -- we know China just doesn't care. I can't tell you how many companies have faced this.
7. Your fund has gone to great lengths to avoid market-timers, and market-timers have in turn avoided you. How have you successfully deterred rapid-fire traders, who are inclined toward global and international funds because of the time-zone inefficiencies to exploit?
Market-timing is technically legal. It's a way investors can capture short-term inefficiencies. In theory, we respect the idea that investors should be able to take advantage of inefficiencies. But we're trying to drive our expense ratio down to rock bottom. If investors come in and market-time, it means we lose money for our investors and it drives up the cost in the funds.
I'm a long-term investor in the fund -- as are my parents, siblings, aunts and uncles and cousins. I want to protect investors' interests, as well as my own.
We've added a redemption fee, so if someone wants to come in and out they have to pay 1%. Also, we're not a good target for timers because we have a very low beta relative to the indexes because of our value orientation. It's common that we will not behave the way a market-timer needs the fund to behave. That also tends to keep people away.
I can sympathize with the big mutual fund firms because it's difficult. They try to keep them out, but the timers have devised very slick and devious strategies to circumvent. I'm delighted that
New York Attorney General Eliot Spitzer is addressing this problem, because it's so inconsistent with long-term investing.
8. How do you evaluate companies? Can you discuss the importance of free cash flow?
It really dates back to the early 1980s, when I was trying to compare companies around the world. A lot of companies didn't even include statements of income. We adopted cash flow as the central gauge because: first, it's more comparable and second, it's less subject to manipulation. It's really kept us out of trouble over the years.
When we look at a stream of cash flows coming out of a company, we can calculate expected return based on where the stock is trading.
9. What looks good in Europe?
We think there are some fundamental problems because of a lack of restructuring. But some individual companies in Europe that we like. One is
, a German company that makes tires and antilock braking systems. They also make electronic-stabilization systems -- they did the great antiroll system in the SUV from Volvo.
They are probably in the most rigid region of Europe where jobs are protected. Continental has taken the lead and shifted a lot of production to Eastern Europe. We've held the stock for well over five years on the initial expectation that the restructuring would pay early benefits. It's taken longer, but we're now cashing in. Margins are strong, cash flow coming in, winning new contracts and increasing production capacity in places like Romania.
10. What are the three stocks you feel most comfortable owning?
Good question. One of the most controversial ones is Tokyo Electric Power. The company is very out of favor, but we think they will ultimately resolve their nuclear utility problem -- and it's throwing off a lot of free cash flow.
How about a European company: We like British homebuilders, like
. It's a good solid company with a lot of free cash flow.
What about all the talk that Britain is witnessing a colossal housing bubble?
I think the British housing bubble is an unfair assessment. Housing prices have been strong in England, but housing affordability has been better than 10 years ago. It's also true that the British government has restricted the supply of new developments, and that's helped.
Last, we'll pick a U.S. company: We think that
looks very good. We like the U.S. health care market in general. The industry is under a lot of stress, but we think Anthem is one of the more efficient providers. As prices go up, people are increasingly seeking efficiency, which will benefit Anthem.
And if you think about it, the health care industry is one of the only areas of the U.S. economy where prices can go up these days.