Barrons: The Three Big Trends to Watch Internationally
By SIMON CONSTABLE
When George Evans, portfolio manager of Oppenheimer International Growth (ticker: OIGAX), isn't worrying about what the future will look like for his investments, it's likely that he'll be reading for pleasure.
The native of the U.K., who graduated from Oxford with a joint bachelor's and master's in geography, and then earned an M.B.A. from Wharton, says he reads an "enormous amount," including history, armchair science, and novels. Though this reading is not directly tied to his day job, "You never know where ideas come from," he says. "It's tremendously important to read extensively."
The search for big ideas is how he manages his $17.9 billion fund. The three big themes represented in the portfolio today—mass affluence, new technology, and aging—will drive long-term trends that will benefit certain companies, says Evans, 54.
To be picked, stocks must pass a number of particularly high hurdles. First, the companies, none of which are U.S.-based, need to be larger than $3 billion in market value. That alone cuts the list to 2,200.The fund has returned an average of 10.1% annually over the past 10 years, vastly outpacing the MSCI ACWI ex-U.S. benchmark, which gained 7.8% a year over the same period, and beating 100% of its peers in Morningstar's foreign growth category over the decade.
Within that group, Evans looks for high-quality companies that will still be around in five to 10 years and have the capability to deliver high earnings from growing revenue. For instance, owners of luxury brands tend to be able to draw in customers consistently and keep growing, he says.
The hunt for companies that can sustain outperformance runs against the market belief that returns have a tendency toward the mean. Evans' research says differently. "There is a set of companies that has maintained or even improved returns," he says. "That is the type of mismatch that drives outperformance."
On a more quantitative basis, he looks for stocks that have the potential to double over a five-year period. That trims suitable stocks to 500—Evans' target list. He whittles it further, to 125 or so, based on returns on capital and some stress-testing.
The portfolio typically has a low turnover. Last year it was 12%, with 12 new stocks added. "We are active investors with a bias for inaction," he says.The testing involves looking at how a company would perform under good and bad scenarios using discount rates of as high as 10% or 15% a year. The idea, he says, is to get comfortable with how much downside risk there is and the degree of upside potential. The resulting portfolio tends to hold smaller companies, with an average market value of $15 billion, versus the category average of $32 billion. Evans says there's no conscious effort to seek out smaller companies, but there's a lower probability that megacaps can double over five years.
The theme of mass affluence, or growing wealth in emerging economies, is a primary theme: About a third of the revenue generated by the companies in the fund comes from emerging markets.
That's a prime reason Evans likes two drinks companies— Pernod Ricard (RI.France), which owns Absolut, Chivas, Beefeater, and Jameson, and Diageo (DEO), which owns Johnnie Walker, J&B Scotch, Bushmills, Captain Morgan, and many other brands. "There is an enormous power of global brands in emerging markets," he says. "People want to own the brands they trust." The trend toward buying premium brands will intensify as emerging markets continue to grow and incomes swell.
Diageo's sales grew 5% last year, for example, but the emerging-markets regions did far better—the Latin America division grew 15%. Plus: "One in three bottles of what is called whiskey is consumed by someone in India," Evans says.
WITH REGARD TO TECHNOLOGY, Evans is particularly interested in the subtheme of "data deluge." He sees a world where data are being created in ever larger volumes.
"What we are pumping down the pipes is getting bigger, and that takes a lot of bandwidth," he says. That presents a plethora of opportunities for the right companies. Overall, the data-deluge category accounts for about 20% of the fund, says Evans, the largest driver of his new-technology theme.
The fund's biggest bet is telecommunications giant BT Group (BT), which owns a network of fiber optics and broadband, which Evans says will drive huge profits. He likens it to owning something like a telecom version of the New Jersey Turnpike, a toll road. Over time, more and more people will be using the network and paying to do so, all of which will benefit BT.
Evans isn't worried that the company is based in the slower-growth region of Europe—the vast majority of its revenue comes from the United Kingdom—as opposed to hotter emerging markets. "We are much more interested of the dynamic within the economy rather than the absolute growth of the economy," he says. Or put another way: Even in a sluggish economy things change, and some industries can grow quickly.
SAP (SAP), the fund's second-biggest holding, also looks set to benefit from the coming data deluge. Along with U.S.-based Oracle, SAP dominates the enterprise resource-planning business. Its heavy investment in technology means the company has a huge advantage in processing data as well as working with cloud technology.
As companies start to spend more on technology, especially on cloud-related initiatives, SAP is well positioned to capture the growth due to the strength of the relationships it already has with big corporations.
When evaluating a new company, being part of one of the major themes is good, but two is even better. That's where Roche Holding (ROG.Switzerland) comes in. It fits both the aging theme and the technology theme.
"It has the best cancer [drug] franchise and is a leading company in diagnostics. It's run its business incredibly well," says Evans. He also points out that it has much less vulnerability to patent expiration than many other companies.