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Julius Baer's Other International Equity Fund

Steven Goldberg

Julius Baer International Equity II A is almost as good as its near clone, Julius Baer International Equity A, which is closed to new investors.



What happens when you take a pair of world-class stock pickers and ask each to do his job with one hand tied behind his back? In the case of Rudolph-Riad Younes and Richard Pell, the results are surprisingly good. "We're like pitchers without one of their seven pitches; we still have six left," Younes says.

We know what Younes and Pell can do with all seven pitches. They co-manage no-load Julius Baer International Equity A -- one of the best all-around foreign funds. In the past ten years, it has returned an annualized 16%, outpacing the MSCI Europe, Australasian and Far East Index by an average of nine percentage points per year. It ranks in the top 10% among foreign funds over the past ten years.

Alas, Baer International, which was once in the Kiplinger 25, our list of recommended no-load funds, is closed to new investors. In mid 2005, Younes and Pell opened a new fund, Julius Baer International Equity II A (symbol JETAX). Initially, I turned up my nose at this pale imitation, but I may have been too quick to condemn it.

The only difference between the two funds: The new fund steers clear of stocks with market values (share price times number of shares outstanding) of less than $2.5 billion. Reason: Younes and Pell now manage $45 billion in the two funds and private accounts, making it difficult for them to invest much more in smaller stocks.

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Otherwise, the funds are almost identical. More than other first-rate overseas managers I know, Younes and Pell spend more time on big-picture economic issues and trying to predict which sectors of the market will excel. So, the sector and country weightings in the two funds are almost identical. Even the market value of the average stock in each fund is close to the same. The median market value of the stocks in both funds is about $17 billion.

But the new fund hasn't performed as well as the closed fund. Over the past year through November 17, according to Morningstar, the new fund returned 29.1% while the old fund has earned 31.5%. Both numbers are far ahead of the average foreign fund and a few percentage points ahead of the EAFE index. Younes says the new fund is trailing because small caps have been strong until recently, and because the new fund had money pour in so rapidly that it was caught holding cash at the wrong times. Still, Younes notes that part of his and Pell's success stems from their ability to invest in companies of all capitalizations. Obviously, the new fund is less of an all-cap vehicle.

Big-picture ideas

But Younes and Pell are terrific big-picture thinkers, and that alone may make investors want to consider this fund. Even if you don't want to buy the fund, it's worth listening to Younes's world view.

The world economy "looks okay on the surface," he says, but trade imbalances between the U.S. and England, both big importers, and exporters in Asia and Latin America are driving growth. The U.S. and the United Kingdom "are living beyond their means." Sooner or later, the U.S., in particular, will have to do something to shrink its trade deficit. "Globalization is going at too high a speed," Younes argues. When someone taps the brakes, it will hurt both the developed markets well as the emerging markets, which have been investing too rapidly.

Younes and Pell are hiding out mainly in Europe. About 62% of the assets of both the new and old funds are in European shares. They've sunk 16% of the funds' assets into Eastern Europe, which Younes believes will benefit mightily from its integration into developed Europe. Much of the rest is in European companies that are either doing a lot of trading with Eastern Europe or aren't heavily dependent on Asia or Latin America. "It's a chicken's way of participating in the world economy without worrying if the U.S. will come to its senses and realize it's selling the family silver," Younes says.

He and Pell also like sectors, such as cement, where they see global consolidation and increased pricing power. And they're bullish on European banks, which Younes says are cheap.

Favorite stocks in both funds with American Depositary Receipts include energy giant Total (TOT), spirits behemoth Diageo (DEO), cell phone service provider Vodafone (VOD) and drug makers GlaxoSmithKline (GSK) and Novartis (NVS).

Lebanese-born Younes is the day-to-day manger of the fund. Pell works on overall strategy and risk management with Younes. "He challenges me on my ideas," Younes says.

I like Younes a lot. This is a good foreign fund -- even without the small-cap exposure. But it's not as good as the original, which is a truly great fund.

Steven T. Goldberg is an investment adviser and freelance writer.



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