Returns: It's a Big World, After All
Charles De Vaulx is a patient man. As a portfolio manager for First Eagle SoGen's mutual funds, the 40-year-old Frenchman scours the globe for prosperous companies you've never heard of -- the more obscure, the better. When he finds a good business that local investors are seriously undervaluing -- say, a German boilermaker with untouted real estate assets or a South Korean yogurt maker unfairly tainted by that country's financial woes -- he buys stock in it. And then he waits, often for years, for other investors, or perhaps a corporate buyer, to recognize the value that he and his team have uncovered. "Time is your friend," he says with Gallic certainty, seated at a polished conference table in First Eagle SoGen's Manhattan offices.
But it isn't just the stocks he chooses that have required de Vaulx's patience. It's also the challenge of getting Americans to invest in companies located anywhere besides America. True, financial planners have been forever telling us that international diversification is good. But during the 1990s bull market, who listened? There was much more money to be made at home, riding the Nasdaq to record levels; foreign-focused mutual funds lost investors in droves. Then, when the American markets plunged in 2000, they helped drag down foreign stocks too, undermining the diversification argument. Maybe if your own business took you abroad, you came back with one or two good investing ideas and were comfortable acting on them. But you might just as easily have been put off by the additional risks and complications involved. The strong dollar threatened to erode your gains, and hazy accounting standards in much of the world made it hard to understand just what you were buying in the first place.
The world turns, though. Now U.S. accounting is under attack and the dollar is weakening, as foreign investors dump their American stocks and look for opportunities in places like Frankfurt and Seoul. As for de Vaulx, his biggest fund, First Eagle SoGen Global (SGENX), gained 10.2% in 2001 and was up a further 10% at the end of June. Investors have awakened to the importance of international diversification. You should wake up, too, if you haven't already. Investing entirely inside the United States is a little bit like putting all your money in Microsoft -- a good company, but not the only good company.
There's more than one way to achieve international diversification. You can browse among the hundreds of foreign companies that list their shares on U.S. exchanges using American depositary receipts. (Visit www.adr.com for an overview.) If there's a specific trend you want to bet on, you might prefer one of the 1,900-plus foreign-stock mutual funds out there, which slice and dice the world's stocks every which way imaginable -- by country, by industry, by company size, and so forth. Morningstar.com can tell you all about them.
But for deep diversification plus some downside protection, value funds like First Eagle SoGen -- as well as Templeton Foreign, Longleaf Partners International, and Tweedy Browne Global Value -- are hard to beat. In the tough markets of recent years, when most foreign funds fared as badly as their domestic counterparts, the value offerings have held up well. That, of course, is what you should expect from a value strategy, which calls for buying into solid and profitable (though often unglamorous) businesses at a substantial discount to their intrinsic value. The diversification benefit comes from the fact that a small company such as Buderus (the German boilermaker in de Vaulx's portfolios) will march to the beat of its local economy far more than a German-based global giant such as Bayer will.
International value investing would be tough to do on your own; the small companies you really want are not the ones that are making their shares available in the United States. And the strategy travels especially well. Stock buyers who are investing in companies located outside the United States still tend to be more focused on growth and less interested in ferreting out undervalued companies. "There's much less competition for value ideas abroad," says First Eagle SoGen copresident Jean-Marie Eveillard. Will the competition heat up in years to come? Of course, diversified investors are already waiting patiently for that to happen.
Financial writer Kenneth Klee writes Returns monthly.
The Inc Life
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