Seeking Shareholder Value
Outside The U.S.
Q&A with Pavlos M. Alexandrakis,
Portfolio Manager,
Pioneer International Growth Fund
Q:
Where can investors find the best opportunities outside of the U.S. right
now?
A:
From a value perspective, with
think Europe is particularly attractive, and Japan
also offers interesting opportunities. Currently, about two-thirds of Pioneer
International Growth Fund's holdings are in European companies (including
22% in the U.K. as of 7/30/99) and a further 21% in Japanese firms.
I
should point out that in developed markets we take a strictly bottom-up
approach to investing, seeking companies that are fundamentally sound, but
undervalued relative to their peers. We first find the stocks and then look
at our potential exposure to country, industry, and currency risk. We like
to invest in companies that are proactively improving returns and profit
margins and not just relying on a strong economy to do it for them.
Q: Would you be more specific about the opportunities in Europe?
A:
Particularly in mainland
Europe, companies are paying a lot more attention to shareholder
value by restructuring their activities. We look for signs such as changes
in management, reductions in the workforce, and disposals of poorly performing
business units that may act as a catalyst in pushing up the stock price.
A
good example is the German electric engineering giant, Siemens
(1.53% of Pioneer International Growth Fund as of 7/30/99), which has
been talking about restructuring for almost a decade and is now finally
doing it. The company, which had about 100 different businesses, is actively
selling off the weaker ones and cutting the number of employees. If you
compare Siemens' stock price with the break-up value of the company's individual
operations, we believe the stock has the potential to double from its present
DM80 level over the next two to three years.
The
French auto manufacturer, Renault (1.31%), is another example.
It recently acquired another carmaker, Japan's Nissan, and could reap substantial
cost benefits from reshaping Nissan's operations.
Q: Which other European companies do you especially like?
A:
In the financial sector, Royal
& Sun Alliance (0.69%) of the U.K. and Axa (0.97%)
of France look attractive to us. They are known as insurers, but both have
built up a substantial business in asset management, a sector with strong
growth prospects in Europe because of demographic changes, primarily related
to focus on pensions and investing for retirement.
Axa,
in particular, has become one of the largest asset managers in Europe by
making the right acquisitions and then taking advantage of the opportunity
to rationalize these units.
Q: What is your approach to finding value in Japan?
A:
Japan can present problems for
a value investor because equity valuations there have historically been
very high. However, using the yardstick ratios of price to cash flow and
price to book value, rather than price to earnings, Japan has displayed
some very interesting value opportunities over the past year. In fact, on
a price to cash flow basis it has shown more potential than the U.S.the
Morgan Stanley Capital International (MSCI) Japan Index had a price to cash
earnings ratio of 13.6 as of 6/30/99, while the MSCI U.S. Index had a ratio
of 18.7 (Source: Factset).
As
in Europe, we look for companies that are focusing on shareholder value.
Japan lags Europe in this respect, but it is gradually catching up. The
major exporters like Sony (1.44%) and Toshiba (1.14%),
for instance, recognize that they must restructure their operations if they
are to remain competitive with international rivals. Sony recently used
its stock to buy out minority holdings in three of its subsidiaries, implicitly
demonstrating faith in its own stock as a value play.
One
of our largest holdings in the portfolio is Shohkoh Fund (2.02%),
which lends to individuals and small businesses in Japan that cannot obtain
loans from other sources. Shohkoh provides a much-needed service, and has
enjoyed wide profit margins since 1992 when Japan's economic bubble burst
and banks became more cautious in their lending practices. The theme underlying
this investment is not restructuring but rather the likelihood of economic
recovery in Japan.
Q: What place do emerging markets have in your portfolio?
A:
In general, they offer good value
now, but they also contain a fair amount of risk. Of course, international
investing always involves risks that include, but are not limited to, currency
fluctuations, social and economic instability, differing securities regulations
and accounting standards, limited public information, possible changes in
taxation, and periods of illiquidity.
These
risks apply especially to emerging markets. A core international portfolio
like ours has to balance value with risk control, so while emerging countries
certainly have a place, this sector currently represents about 7% of the
Fund's total investments (excluding Hong Kong and Singapore, which we consider
developed markets).
Q: Does your bottom-up, stock-picking approach lead you to concentrate on certain sectors?
A:
Well, we do have a large overall
position about 15% of the portfolio in the telecommunications
sector because it has huge growth potential on a global basis and we
expect a lot of consolidation. There are just too many participants in this
industry. We have four telecommunications-related companies among our top
ten holdings, including Nokia (1.65%) of Finland and Vodafone
Airtouch (1.96%) of the U.K. Nokia has demonstrated a consistent
growth record, while Vodafone now has the chance to cut costs from newly
acquired Airtouch in the U.S.
Financial
companies are another area
of focus. They account for about 22% of the total, if you include all categories
such as banks, insurers, and asset management companies. I should add that,
as part of our risk guidelines, we limit our exposure to any one industry
to about 25%.
Q: Europe, like the U.S., saw a significant shift earlier this year into the large-cap, growth stocks. Are you following this trend?
A:
Overall, our Fund has moved assets
into the large-cap sector since the start of the year. In many cases you
simply cannot ignore the fact that big companies have a dominant market
position. But we continue to follow a broad universe of stocks and, like
emerging markets, the more nimble small-cap companies with value potential
will have a place in the Fund.
For
example, we own Valmet-Rauma (0.53%), a small Finnish company
(to be renamed Metso) that manufactures machinery for the paper industry
and is known for its low cost production. It also assembles automobiles
for Porsche and Saab. The stock is cheap -- it is currently trading at a
price to cash flow ratio of 9 based on 1999 estimated cash flow.
Our
Fund also has a holding in Bipop (1.35%), a small Italian
regional bank formerly known as Banca Popolare di Brescia. Bipop recently
started one of the first Internet brokerage operations in Italy, catering
to the individual and small business market, and it has been very successful
thus far.
Q: Earlier, you mentioned determination of currency risk, alongside country and industry risk, as an important factor in stock selection. How do you handle currency risk in the Fund?
A:
Over the long-term, currency movements
tend to balance each other out. However, where we have large stock positions
in Japan and the U.K., for instance we do take the precaution of hedging
currency exposure if we think it appropriate. Recently, we have hedged about
70% of our Japanese yen exposure and about half of our sterling risk, representing
approximately 26% of the portfolio as of 7/30/99.
We
only hedge to cover existing positions, never to speculate on currencies.
Although our aim is to correlate a position with an appropriate hedge given
the potential risks we see, this provides no guarantee that all losses will
be covered should a currency go down in value.
Q. What is your research process for finding stocks?
A:
We use a proprietary screening
process to obtain an initial list of stocks, and a team of analysts researches
these in greater depth. We do use some outside research for industry-specific
expertise, but most of the work is done internally. Our analysts check the
financials of those stocks on the list and we then interview the most promising
companies in person, either by traveling or by inviting them to our offices.
The
key is to find the catalyst I mentioned earlier: a sign that the company
is doing something fundamental to deserve our interest, and potentially
to convince us to invest. It is not easy to get the timing exactly right
but, over the long-term, we believe this disciplined value approach has
the potential to improve returns.
Editor's
Note: For information on Pioneer
International Growth Fund, please request a free kit from your investment
representative or Pioneer at 1-800-225-6292.
