James K. Glassman :
(© 2002 The International Herald Tribune, November 9,
2002)
Why it pays to go global
In the good old days, if U.S. stocks were having
a bad year, non-U.S. stocks would
be having a good year. The rule was that if you
owned a globally diversified portfolio,
you got a smoother ride while sacrificing little
if any profit.
But U.S. stocks have performed miserably over the
past three years, and so have the
others; and when American shares were rising in
the late 1990s, so were foreign
shares. In fact, as Money Report noted Sept. 28,
something profound has happened
to the relationship among stocks in nearly all developed
countries: It's gotten tighter. In
technical terms, the correlation between U.S. and
non-U.S. stocks has increased -
from about 65 percent at the start of 1994 to 85
percent in 2001. In other words,
stock prices in markets from Italy to Australia
to the United States are moving nearly in
lockstep.
These high correlations are not good news. No longer
can you reduce the volatility of
your holdings simply by owning a portfolio with
regional variety. But there is some
good news on the international front. If you think
U.S. stocks are attractive, then look
at some non-U.S. stocks. They're gorgeous.
Before plunging in, though, U.S.-based investors
might need to adjust their thinking
about "foreign" stocks, starting with a new view
of that word, “foreign.” Consider
Nokia Oyj, the cellular phone maker. It is based
in Helsinki but does business all over
the world, and a majority of its shares are owned
by Americans.
Is Nokia a Finnish company or an American company?
I'd call it global and leave it at
that.
The point is that no sensible investor owns Nokia
because it lends “Finnish balance,”
or even European balance, to a portfolio. The reason
to own Nokia is that it is a
well-run business and that it represents a sector
(high-tech telecom) that is depressed
today but should revive in the future.
Why have correlations increased?
“First and foremost,” says a recent report by Sanford
C. Bernstein Co., the New
York money-management and research firm, “is the
rising tide of globalization.”
McDonald's Corp. has 57 percent of its fast-food
outlets outside the United States,
and last year two-thirds of its profit was earned
abroad. Conversely, Luxottica Group,
a wonderful company based in Milan, operates seven
eyeglass-frame plants - six in
Italy and one in China - but owns two American retail
chains, LensCrafters and
Sunglass Hut, as well as the quintessential American
sunglass brand, Ray-Ban. It gets
only one-fourth of its revenue outside the United
States. Other factors are supporting
correlation, too, Bernstein says, including “the
rise in foreign ownership of stocks in
most markets and the growing global convergence
of interest rates - the latter courtesy
of the European Union and successful inflation-fighting
by the world's major central
banks.” These confluences are not going away.
The best approach to building a portfolio today is
to forget the old notions of balancing
by country or by continent and instead concentrate
on owning the best companies in
different sectors, wherever those companies happen
to be based. And right now,
there's good reason to put a non-U.S. spin to your
holdings. European companies,
especially, have become much cheaper than American
ones - by some reckoning,
cheaper than they have ever been before.
Listen to Thomas Tibbles, who manages the Forward
Hansberger International
Growth Fund: “U.S. valuations are as low as following
the 1987 crash, but other parts
of the world are cheaper.” In much of Europe, Tibbles
said, it is “like the early 1970s.”
While the fund's prospectus allows Tibbles to buy
stocks anywhere outside the United
States, his top five holdings (and eight of his
top 10) are European. His No. 1 holding
is TotalFinaElf SA, the French energy company. Total's
price-earnings ratio is just 15,
or about one-fourth less than the P/E of a similar
U.S-based energy company.
Tibbles's fourth-largest holding, Unilever, the British-Dutch
consumer-products
company whose profit has been growing at about 10
percent annually, is projected to
earn a little less than $4 a share next year, about
the same as Procter Gamble Co.,
another well-run brand-rich conglomerate. But Unilever
closed at $63.90 on
Thursday, while Procter Gamble closed at $88.01.
At those prices, Unilever is a
relative bargain.
Tibbles also owns Japanese stocks, which, though
trading at high multiples, contain
some bargains. He cites Honda Motor Co., which trades
at a P/E of 9, based on
earnings projections for the current financial year,
ending next March.
Forward Hansberger is a relatively new fund (started
in 1999) that has had three solid
years in a row, beating the category averages in
each.
A more venerable institution, Oakmark International
I, founded in 1992, has whipped
the primary international stock index by an annual
average of 6 percentage points over
the past five years. The fund's managers, David
Herro and Michael Welsh, have also
chosen to emphasize European stocks, which account
for all of their top eight holdings.
The No. 1 holding, at last report, was GlaxoSmithKline
PLC, the pharmaceutical
company based in England. It trades at a P/E, based
on next year's estimated earnings,
of just 15. Another major holding, Akzo Nobel NV-
the world's largest paintmaker,
with $13 billion in sales, and based in the Netherlands
- trades at a P/E, based on
2002 earnings, of only 11. Some 15 percent of Oakmark's
holdings are in French
stocks, including BNP Paribas SA, banking; Aventis
SA, drugs; Pernod Ricard SA,
alcoholic beverages, and Publicis Groupe, advertising.
Another fund that has whipped the averages in the
past five years, Julius Baer
International Equity, is also overweighted in European
stocks. Among the top holdings
of its managers, Rudolph-Riad Younes and Richard
Pell, are Bayerische Motoren
Werke AG and Henkel AG. The Julius Baer managers
have kept losses this year
down to 6 percent, or about two-thirds lower than
the average international fund. They
may owe part of their success to another change
that has occurred over the past few
years.
While global-market correlations are increasing,
sector correlations are declining. In
other words, they move up and down at different
rates and at different times. Low
correlations are good for portfolios. If you concentrate
on diversifying across sectors,
as Younes and Pell have done, you can hold down
risk while maintaining decent
returns. In a letter to clients, Greg Jensen and
Jason Rotenberg of Bridgewater
Associates in Wilton, Connecticut, write: “It makes
sense that Citibank has more in
common with Deutsche Bank than it does with General
Motors, which has more in
common with DaimlerChrysler than it does with Citibank.
Markets, however, have not
always traded with this in mind.”
So the rules of the game have changed. Throw away
the map. Focus on sectors:
technology, energy, consumer goods, finance, real
estate. Own lots of them, and own
the very best companies in each. Seek them out,
or let a fund manager do it for you.
Scour the world. James K. Glassman's e-mail address
is jglassman@aei.org.