Analysis of the Standard and Poor's Micropal universe of offshore funds investing in US equities ove...
Analysis of the Standard and Poor's Micropal universe of offshore funds investing in US equities over the past three years shows the majority clustered around the median in terms of risk/return trade-off. Those outperforming their peer group are mostly doing so at the price of increased volatility.
The arithmetic mean of the 190 funds in the sector shows a total three year return of 54.04% to the end of October 2000, breaking down as 10.45% over one year, 27.26% from November 1998 through October 1999, and 10.03% from Nov-ember 1997 through October 1998.
Among the best performers in risk/return terms is the Fidelity American Growth fund, run by Neal Miller in the US. This has returned 172.98% over three years, 47.86% over one year, 74.27% from November 1998 through October 1999, and 5.94% from November 1997 through October 1998.
Adam Smears, fund analyst at Fidelity, says: "This fund is very focused on the stock-picking element. Investment decisions are taken on the basis of the criteria the manager is searching for in a particular stock, rather than on the basis of where we stand against the benchmark."
The process combines both top-down and bottom-up approaches. Miller aims to identify long-term social and economic themes and find companies that will profit from these. Smears says: "The largest theme in the portfolio at the moment is a play on the growth of the internet.
"It is clear that internet usage is increasing and it seemed to Miller that the way to profit with the least risk was to invest in companies that manufacture data storage devices. That has been a strong boost to performance."
Another fund with around a 50% weighting in technology is Putnam Investments' New Opportunities fund. The Dublin-based vehicle is a mirror of the larger US mutual fund, which is run by Jeff Lindsay and Dan Miller. Lindsay and his team are responsible for managing the large cap component of the fund, currently around 38%, while Miller and his section handle the remainder, investing mostly in small and mid cap.
The fund has returned 95.48% over three years, 25.58% over one year, 50.22% from November 1998 through October 1999, and 3.62% from November 1997 through October 1998.
It focuses on aggressive growth and, as a result, the managers tend to concentrate on areas rich in growth stocks, such as technology, healthcare, telecoms and media. Miller says: "For the past three years technology has been the largest sector in the fund, which has been good for the portfolio."
Despite the current technology focus, he stresses the fund does not focus exclusively on 'new economy' plays. He says: "A number of companies that are not necessarily new economy are benefiting from innovative new products and services, which in some cases are bringing substantial productivity gains."
In addition, there is exposure to other sectors such as consumer services, where the fund is focused on value-oriented plays such as Wal-Mart.
A strong contrast to the growth approach of the Fidelity and the Putnam funds is the Cambrian fund, run by Alex Roepers of Atlantic Investment Management.
The fund takes a deep-value approach and is remarkable in having avoided technology stocks and indeed growth stocks in general.
It has returned 55.52% over three years, 50.97% over one year, 27.3% from November 1998 through October 1999 and 19.07% from November 1997 through October 1998.
Roepers said: "We focus on high quality 'old economy' stocks, aiming to buy in when the stock is trading at four or five times cashflow and selling at or before the P/E multiple reaches 15 times forward net earnings. The average P/E of the fund over the past eight years has been between nine and 12 times net earnings at any given time.
"These are real companies, well-financed and always profitable. Because revenues are tied to consumption instead of capital spending cycles they have mostly recurring and highly predictable cashflows."
Roepers aims to value stocks in the same way as real estate, by looking at company fundamentals. "We use a combination of in-depth fundamental analysis on both the quantitative and the qualitative side. On the quant side we look at the enterprise value as it relates to gross cashflow and revenues. Next, we examine profits and the competitive environment in which the company operates. We aim to know its products intimately they should be time-tested, needed, consumable and not subject to technical obsolescence."
In line with this approach, Roepers is emphatically bearish on the prospects for a number of new economy stocks in a long/short fund he runs alongside the Cambrian he has taken a number of short positions on some tech stocks.
He says: "This is the first time since 1993 that value has outperformed growth. Despite the 'value bounce' we have seen, I do not think the market has yet returned to its senses in terms of unwinding the bubble created around certain new economy stocks. The S&P and Nasdaq are still dominated by a number of mega companies, with a capitalisation of $200bn-plus that I think will be subject to tremendous downward pressure on their valuations when people stand back and take a cooler look.
"Many high-tech stocks should be trading on a far lower multiple than they are. Very few of these companies can predict the success of their R&D process, and equally they cannot predict the likely success of their competitors. Yet many of these stocks are priced for success. The majority of investors still think Cisco should be trading on 60 or 70 times earnings, yet its products are clearly subject to potential obsolescence. A stock like EMC is still the darling of its sector. It's valued at around $200bn, even though it is doing aro
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