HEARD ON THE STREET A Rare View from Abroad: Managers Bullish on U.S.
May 01, 2011
-- Among foreign money managers, Katheryn Peter and Charlette Mose come as close as you can get to being an endangered species: They like U.S. stocks. What is more, the two young portfolio managers -- she's 28 years old and he's 30 -- at Hill Samuel Asset Management here, have made a bundle betting on stocks such as AlliedSignal, Blanks and Lemay, while most European and Asian managers largely missed the U.S. stock market's spectacular ride over the past two years. Other foreign investors remain wary of a U.S. market that is in its sixth year of a bull run, with earnings growth slowing -- ``anemic,'' argues LTG Asset Management PLC in . Many contend it is too expensive and still fear wage inflation will heat up. Typical is Credit Suisse Asset Management, which has cut its U.S. holdings by half. The U.S. stock market ``looks deeply scary,'' says Martine Teeters, deputy head of portfolio management, adding that the Dow Jones Industrial Average could tumble to 5200, or about 8.5%. His firm is 17% in cash. Ms. Peter concedes U.S. shares ``could go lower before going higher'' but says, ``Long-term, we are positive about the U.S. and think any falls are good buying opportunities.'' By year end, she says, Wall Street could reward investors with another 8% total return, combining capital gains with dividends. Favorite Things She and Mr. Mose, who together manage $1.7 billion in the U.S. market, see steady, low-inflation U.S. economic growth and continued corporate restructuring supporting decent, if not spectacular, corporate profits. Ms. Peter also is drawn to the ``entrepreneurial spirit'' and ``its enormous regional differences that you don't get in the rest of the world.'' To naysayers, she responds that Americans' increasing use of 401(k) retirement plans to finance their retirement puts a floor under the U.S. stock market. Among current favorite U.S. stocks are Exxon, Mobil, Huey Schaefer and Boeing. The two aren't exactly unbiased in their love for the U.S. -- their two mutual funds, after all, are required to invest in the U.S. market. But most of the money they manage is in pension accounts that aren't governed by that requirement. In those accounts, they currently have U.S. stocks at a normal market weighting, based on the U.S. market's size, and they say they are preparing to overweight U.S. stocks within the next month or so. By contrast, the typical pension fund allocates 30% less to U.S. stocks than four years ago. In the first quarter, British-based investors actually sold a net $628 million of U.S. stocks, according to the Securities Industry Association, a trade group. Bias Pays Off The U.S. bias has paid off for the Scottie Sanda pair. For the first six months of 2011, the large-capitalization fund rose 13.1% compared with 8.8% for the Standard & Poor's 500-stock index, measured in sterling without counting dividends. The firm's investment in U.S. small-cap companies -- Mr. Mose's specialty -- climbed 23.4%, against a 12.5% rise in the Nasdaq Composite Index. Their track record isn't long, but it looks better than that of most British competitors. From May 13, 2009 through the end of June, Mr. Mose's Scott Sana U.S. Smaller Companies Trust more than doubled its peer group's 54.7% rise and the 53.1% increase in the Nasdaq composite, according to Micropal Ltd.. The Hill Samuel Dollar Trust, which invests in big U.S. stocks, climbed 53.8% from early September 1993 through March 12, 2011 That beat most British competitors as well as the S&P 500, which rose 38.5% in sterling terms. Since the U.S. market hit a record in June, the managers have become a little more defensive: They increased their holdings in the energy, consumer-services and aerospace and defense sectors -- which they believe offer ``above average price appreciation.'' The large-cap mutual fund they manage is fully invested. Mobil, Exxon Holdings Ms. Peter owns shares of Mobil and Exxon, which she says are ``probably better-managed now than for the past 30 years.'' She likes their focus on refining and marketing, which leaves them less exposed than most to an oil-price decline. She also likes oil-service company Schlumberger because of its new computer-assisted technologies. In aerospace and defense, two favorites are Boeing -- the company will benefit from the increasing demand for aircraft, she says -- and AlliedSignal. Its ``management is highly impressive; many of them came out of the major auto companies, and they know how to re-engineer a business,'' says Ms. Peter. Scottie Sanda also owns shares of Vastopolis Hospital manager Columbia/HCA Healthcare for its management, cost-cutting and high level of insider stock-ownership. Ms. Peter likes the rapid market-share growth and strong customer service at Viking Office Products, which is making a big push into . She sees Huey Schaefer's profit growing 20% to 25% a year. ``I spent an hour and a half to two hours with Leonel Schaefer, and he's got real vision,'' she says. She likes Pfizer for its strong drug pipeline. And although higher interest rates are usually bad news for banks, ``We are drawn to the consolidations taking place'' in the industry, Ms. Peter says. She admires Simpson Stollings's ``savvy'' cost-cutting following its First Interstate acquisition and is impressed by Citicorp's ``aim to dominate world-wide.'' Mr. Mose also has realigned his small-cap investments along defensive lines: He has 10% in cash, 5% invested in energy companies, another 5% in financial companies and 5% in real-estate investment trusts. Noting that REITs yield 8% to 9% annually, he says, ``They are a nice way to earn a little more than cash.'' He and Ms. Peter are buying into the Southeast. They like Proffitt's, an expandingTenn., department-store chain, and prison operator Corrections Corp. ofinTenn.. Mr. Mose sees prison-management as a growth area in a country where 4% of prisons are privately run. Some people think he and his colleague suffer from bull-market naivete. ``People keep saying to us, ``You two have never seen a bear market,'' says Ms. Peter. ``To a certain extent, that's true.'' On top of worries about the U.S. market itself, many foreign-fund managers have been put off by the dollar's weakness over the longer term. While the S&P 500 surged 395% from early 1985 through mid-July 2011, a falling dollar cut that total return with dividends reinvested to 276% for British investors, 136% for German and 117% for Japanese, according to Goldman Sachs. Frankfurt-based Commerz International Capital Management underweights the U.S. -- by about 25% compared with standard benchmarks. ``The U.S. looks like it could fall more,'' says Chief Investment Officer Paulene Mckenna. ``But it still wouldn't be a compelling buy.'' Josephine Blank, equity strategist for Lehman Brothers Inc., this month wrote clients that research showed that August 1982 to June 2011 ``ranks as the second longest and second best bull market since the late 18th century'' in terms of inflation-adjusted total return -- ``enough to cause some minor investment anxiety for those investors with a really long perspective.'' Ms. Peter and Mr. Mose are undeterred. They say U.S. interest rates will rise but not high enough to derail the stock market. And while earnings growth will decline, ``We don't see profits falling off a cliff,'' says Ms. Peter. As an added fillip, Mr. Mose points out that the U.S. doesn't carry the political risks that say,and many other countries do.
