Profiting abroad, stock by stock
To reap gains overseas, Phoenix fund manager Rajiv Jain focuses on great companies, not sizzling markets.
(FORTUNE Magazine) - Overseas markets have been hot -- and Americans have noticed. Last year, for the first time ever, investors put more money into foreign-stock funds than into domestic ones, according to the Investment Company Institute. Rajiv Jain, who manages the $135 million Phoenix Foreign Opportunities fund (up 19% annually since he took over in 2002, vs. 15% for the EAFE index), says the key to success abroad is seeking out good companies, not just thriving countries. Jain, who also manages about $3.5 billion in institutional portfolios for Vontobel Asset Management, recently sat down with FORTUNE's Corey Hajim to talk about his bottom-up approach, why he's never put any money into Russia, and how Tesco is giving Wal-Mart a run for its money.
How would you describe your strategy?
It has evolved over the years, as I learned from my mistakes. In the 1990s, I was much more involved in emerging markets because they were growing so fast; then they went through a lot of crises. We used to do top-down analysis, but that didn't help me avoid those meltdowns. Since then we have been bottom-up stock pickers--we don't really care how fast the country is growing. We look for high-quality, predictable businesses that we are fairly confident can grow at least at high single or low double digits for the next four to five years.
Give us an example.
There is a Korean ice-cream and candy company called Lotte Confectionery that we have owned for almost ten years now. This is a company that has 70% of the chewing-gum market in Korea, 40%-plus in ice cream and candies. It has fantastic distribution. The stock is up about 15 times over that period because the earnings are up a similar magnitude.
What about elsewhere in the world?
Red Electrica is a power transmission company in Spain. It runs the grid. It is a monopoly. Spain's power consumption is much lower than the rest of Europe's, and it is growing rapidly. We've owned it for a couple of years, and it is still selling at 18 to 18.5 times earnings, with a 2.4% dividend yield. So you are getting emerging-market-like growth in a developed regulatory environment.
In February, British retailer Tesco announced it is entering the U.S. market. Can it compete against Wal-Mart?
The U.S. has been a graveyard for foreign retailers. It is one of the toughest, most competitive environments. But Tesco is going to start with the small Express stores, competing basically with 7-Eleven in California. What's interesting is that Tesco has grown double digits for the past ten to 15 years, is still growing at 12% to 13%, and sells at 13 times earnings, and almost two-thirds of its enterprise value is in property that it owns. So there is an inherent anchor. It is doing phenomenally in Korea, doing very well in Taiwan and Thailand, has a small foothold in Japan and China ... and is one of the largest retailers in Eastern Europe. It has 30% market share in Britain. It is actually as efficient or more efficient than Wal-Mart if you look at overhead as a percentage of sales. Wal-Mart has even complained to the authorities in Britain, saying they should check on anticompetitive practices by Tesco, which I thought was kind of ironic. I think Tesco is better than Wal-Mart--it has a much better global presence because Wal-Mart has struggled outside Mexico and Canada.
What markets would you avoid?
Venezuela just scares the hell out of me. It is kind of a meltdown scenario once oil comes down. Another country we have been leery of is Russia. The way things are going on the corporate-governance side and the way Putin has been consolidating power, we just find it unnerving. One area we have been avoiding completely is Eastern Europe. There it is the valuations. There's been a lot of excitement over their joining the EU, which obviously we believe is more than priced in. Such things are a mixed blessing. As the markets open up, there are going to be a lot more efficient firms coming in, and that means more competition.