How to Win -- Cautiously -- in Asia
Richard Foulkes of Vanguard International Growth Fund (VWIGX) sees Japan and the Far East eventually becoming this year's "great play." Until then... YOUR MONEY by Robert Barker March 19, 1999
Foulkes's Biggest Bets
(On Feb. 28, Vanguard International Growth had 32% of its assets in these 10 stocks:
Company/Symbol*
1. Novartis NVTSY
2. ING Groep ING
3. Endesa ELE
4. Fuji Photo Film FUJIY
5. Vivendi VVDIY
6. Suez Lyonnaise Des Eaux SLEFF
7. Mannesmann MNNSY
8. Union Bank of Switzerland UBSRF
9. Telecom Italia TI
10. Philips Electronics PHG
*American depositary receipts)
Frustrated with your foreign-stock investments? If so, you've got plenty of company. Over most every recent period, investing abroad has badly trailed domestic stocks. The Wilshire 5000 Index, which captures nearly all U.S. equities, returned an annual average of 17.5% over the past decade. The key foreign-stock index? Just 5%.
Despite that dreary backdrop, assets in the $7.5 billion Vanguard International Growth Fund (VWIGX) have more than doubled since 1995. Luring investors is the long experience and relatively low-risk style of Richard Foulkes, who has managed the fund since its 1981 inception. It doesn't shine every year, but over the past decade the fund has beaten its foreign-stock benchmark by an annual average of 4.4%.
Stationed in the London headquarters of Schroder Capital Management International, which contracts with Vanguard to run the fund, Foulkes is a rarity on the publicity circuit that so many fund managers now travel. Yet I caught up with him one recent evening in Miami, where he alighted briefly for a conference. In a globe-spanning discussion, Foulkes filled me in on how his current investments -- chiefly in Europe and Britain -- are doing and what new stocks he's buying. Most intriguingly, Foulkes sees Japan and the Far East eventually becoming this year's "great play." Here is the first of a two-part special Your Money Q&A (the second part will appear in this space next week):
Q: After having finished 1998 very strongly, your fund is up just 0.4% this year, vs. the benchmark's 1.7% gain. What's going on?
A: Well, it's early days this year, Bob, and as you say, it finished last year very strongly. It's got a strong bias toward Continental Europe, and I suppose what has hurt it in these opening months of the year is the weakness of the European currency, the euro, at a time when European stock prices haven't really gone up, on average, too much.
I'm in no sense discomfited about this. I actually think that the circumstances, particularly in Europe -- I mean Europe including the U.K. -- are actually quite friendly toward stockholders, and I've got over 75% of the fund in Europe broadly speaking, including the U.K. So I'm not quitting on that bet at all.
Q: How do you see the rest of 1999 unfolding?
A: I don't want to give you the impression it's going to be an easy year. But I think the opportunities to make money this year ultimately will come from the Far East. But I am in no way ready yet to put my money into the Far East.
Q: How much do you have in Japan now?
A: I'm still running at about 12% in Japan. Consistent with my own caution about Japan, I've got all the yen hedged because to me one of the most probable features of Japan over the next six months is the yen is going to weaken quite substantially [against the dollar]. And I was lucky enough to close the hedge that I had on all of last year at about 140 yen to the dollar. So I was unhedged through all of that very sharp rise that we saw in the yen to 108, and I have now put that yen hedge right back on.
Q: I see. So you're protected against a weaker yen?
A: To me the most obvious thing is that the Japanese somehow or other are going to have to monetize their debt. As you know, at the moment, money at the central bank's window costs 0%, which is an interesting concept. It's effectively free as long as you pay it back again. This is the Japanese central bank getting as near to monetizing the debt as they can. And I think that if money is that easy, then we are inevitably going to see money flowing out of Japan, particularly after the end of the year -- the fiscal year ended the 31st of March. I think after that yearend, we are going to start to see money beginning to flow out again. Surely into assets that actually generate an income.
Q: Last year you listed as two preconditions of a Japanese rebound: first, U.S.- or Euro-style corporate restructurings, and second, the government taking action to spur the economy. Where do we stand now?
A: Japanese companies are just entering the [financial] results season, [which is] typically at the end of March. They have got some very unpleasant numbers to reveal to shareholders, and a lot of them are trying to sweeten the pills by announcing restructuring measures. We've seen 30-odd companies do this in the last couple of months. Each of them has been greeted enthusiastically by shareholders. But a lot of these restructuring plans are lip service to what you and I would call restructuring. And very few of them are going to be effective.
In a sense, it's like an exact replay of the share buyback fashion that we had a year ago, which they used again to sweeten their '97 numbers. And again, as you know, very, very few shares were bought back even though they all announced these things. Well, I think, being cynical, that's exactly what we're seeing again: very little real restructuring and something to sweeten very bad news coming up.
Q: So, I gather, you see no reason to expand your Japanese holdings right now?
A: I've got absolutely no intention of expanding my Japanese holdings at this time.
Q: Is Fuji Photo (FUJIY, $41.38) still your biggest position there?
A: Yes. I have got some really great, world-class companies in the portfolio that happen to be Japanese. And those are the only things that I've got in Japan. I've got one or two other smaller positions.
Q: Which companies are they?
A: Takeda (TDCHF, $38.38), which is a great pharmaceutical company. It is much cheaper than European or American pharmaceutical companies. Very, very conservative accounting. They've got a great blockbuster drug in the market for diabetics, which they will be launching this year, along with a hypertension drug. Those two together are going to be real blockbusters. There is a competitor drug in the diabetes market from SmithKline Beecham (SBH, $67.62), but it's such an enormous market that they can both make money out of it.
Q: What else?
A: I've got a big holding in Murata (MRAAF, $32.22), which makes components for mobile telephones, and that business has been, as you can imagine, booming the last couple of years and continues to look good. It's not cheap, but it is, again, one of the great world-class companies that happens to be Japanese. And I've got a big holding in Matsushita Electric Industries (MC, $190.50), which just is the ultimate recovery situation, with a price-to-book [value] of about 1.0. And that is exactly the sort of stock that I will probably triple my holding in when I think that the economy is finally turning and domestic consumption of their product takes off. It's so cheap that I dare not have some, but typically that's the sort of share that I will really buy heavily when I think that consumer demand is going to pick up because that's essentially a stock that has all of its sales in Japan and the rest of Asia.
Q: How might a Japanese rebound unfold?
A: If you just think of the Nikkei going down, say, to 12,000, that's not a big deal. If you think of the Japanese yen dropping about another 15%, that's not a big deal either. That's to 140, 145 [yen to the dollar]. That's where we saw it before. Those will happen at the same time because they will be reflective of how weak the Japanese economy is. Once we get to that sort of level, that really does begin to create bargain levels. And just think of when things begin to pick up. You could easily see the Nikkei at 18,000, 20,000. These are the levels of a year ago. And we could easily see the yen -- if there is beginning to be a recovery in the economy -- back up to 105, somewhere around there. That's an effective doubling of your money.
So what I'm saying is that it's going to pay to be clever and wait for the real crisis. And at those levels, when you get the turn, it could very, very rapidly be, in dollars, a doubling of your money. That's why I'm saying it's going to be the great play this year. But absolutely not now, because I think you could lose 30% of your money.... I don't want you to cast me as a bull on Japan, but I do think it's going to be a wonderful ride if you've got the guts to wait for the bottom. You could see it double in a year, actually.
Q: So you see great potential there -- but not quite yet?
A: Yes. Now the other thing to say is, as the yen weakens -- assuming it does, of course -- it's going to hurt the other Asian markets, because they depend upon Japan. And China's not looking too good, either. So all of those Asian markets, I think, are actually going to be held back by continued weakness in Japan, by weakness in the yen, and by a lot of nervousness about what is going on in China. So the turn in Japan will also probably be the turn in those other Asian markets. So it's not just Japan I'll kick into. I'll kick into all these others at that time: the Koreas, Singapores, the Hong Kongs at the same time.
Q: I see.
A: It's a great big play this year. It may not turn out this way, but that's what I'm investing for at the moment, or not investing for, but waiting for. That's why I've got all the money in Europe at the moment, because I don't want to have it in the Far East.
Barker covers personal finance for Business Week from Melbourne Beach, Fla. |
