5 Questions for a Global Fund Manager
Harding Loevner is hardly a household name in the mutual fund business. That's because the 19-year-old Somerville, N.J., firm, which specializes in international markets, has catered primarily to institutional investors.
However, it offers five no-load funds to individual investors, and its Emerging Markets Portfolio (symbol HLEMX) has quietly amassed $2.4 billion in assets and built a solid track record. Over the past five years through June 19, the fund returned an annualized 32%, putting it in the top 25% of diversified emerging-markets funds over that period, according to Morningstar.
While in New York recently, Simon Hallett, the firm's chief investment officer and lead manager of the Emerging Markets fund and International Equity Portfolio (HLMIX), joined us for breakfast to discuss the current state of the global stock markets.
KIPLINGER'S: There seems to be a growing consensus that commodity prices are peaking and that when they fall, they'll take emerging-markets stocks down with them. Do you agree?
HALLETT: People talk about emerging markets as beneficiaries of the commodities boom, but not all of them are. Look at India. Look at China. China is a net importer of commodities. China and India are the two big guys. Brazil and Russia are exporters. South Korea and Taiwan are large emerging markets that are net consumers of commodities.
In our broader strategies, you can see where we got it right and where we got it wrong when it comes to commodities. Our style is very much a growth style, and it is our view that commodity prices historically have been cyclical. We thought there was going to be a long cycle in base metals, and we invested early in that growth opportunity. But we also exited early, so we've been underweighting metal producers for far too long.
The way our portfolios have benefitted from the rise in commodities has been through energy, where we do have significant holdings. Our international portfolio probably exemplifies it best. At the moment, we probably have 15% to 16% in energy stocks, which is considerably more than the benchmark [MSCI All Country World ex-US Index].
What stocks do you like in the energy sector?
We've emphasized companies that differ from traditional big-oil plays around the world. We've owned such stocks as Gazprom, in Russia, Sasol (SSL), in South Africa, and two Canadian companies, EnCana (ECA) and Imperial Oil (IMO).
These have been the companies that have been able to grow volumes and to grow revenues, and the rise in crude prices has given the stocks an unexpected boost. But that wasn't something we were prepared to forecast. I should say that we've owned Imperial Oil since 1994. It has been a great, great stable-growth company. EnCana is mostly a gas company.
Sasol is a former state-owned company that went public in 1979. It was the first stock I ever owned personally. Sasol's big asset is basically coal reserves in South Africa, and it uses its technology to convert coal to diesel fuel. So you can see why that's been a good stock lately. Coal prices are high, Sasol has a gigantic reserve in South Africa, and the technology enables it to produce a relatively clean fuel. We've owned it for eight years.
Our most recent purchase was Schlumberger (SLB), the oil-services company, which we bought in the first quarter.
What non-energy stocks do you like?
We are looking for companies that can grow across the economic cycle, companies that have what we refer to as tail winds. Tail winds can be from technological advances, from demographics. We are quite happy to invest in companies whose earnings are volatile but are basically in a rising trend.
That tends to make us investors in companies such as Nestlé. We have been investors in Nestlé for nearly 20 years. It's a company with a great balance sheet and is very well managed. It has decades of history of developing new products and taking those products into developing markets, as well as mature markets. It's the kind of company that is going to grow somewhere between 9% and 12% a year -- not every year, but for a very, very long time.
What else do you like in developed markets?
We recently added to a holding in Tesco, the global supermarket company. It now holds 30% of the supermarket industry in the United Kingdom. It has an everyday-low-pricing strategy, which it has taken from U.K., where it dominates, and exported to Eastern Europe. It's one of the biggest supermarket companies in Poland. Tesco, along with Asda, now the Wal-Mart affiliate in the U.K., was responsible in some ways for what they call the hollowing-out of the High Street [High Street is an English term for a town's main shopping street].
As car penetration increased in the U.K., people stopped buying at the High Street and started doing their daily shopping the way Americans do. But Tesco for the past 15 years or so has helped reverse that trend. It's opened up smaller shops -- kind of convenience-type food stores -- still on the High Street. So it's taken that concept and announced plans to open up a chain of stores called Fresh & Easy Neighborhood Market on the West Coast in the U.S.
The market gets very concerned about any retailer that tries to compete in the U.S., which is obviously a very competitive market. We don't know whether Tesco will succeed or not, but we're prepared to back management's judgment on this -- management's judgment at Tesco has been phenomenal over the past 20 years. The downside is really quite limited, but the damage it did to the stock price was really out of all proportion.
And it's quite interesting that in the past few weeks Wal-Mart (WMT) has announced a similar kind of extension of its own shops, which obviously increases competitive pressure on Tesco. But Wal-Mart's move suggests that there is at least a market for these convenience-type stores, which some people doubted.
How shareholder-friendly are companies in the rest of the world compared with those in the U.S.?
I think the U.S. is catching up with rest of world. I'm kind of joking, but people forget that back in early '80s, corporate governance in the U.S. was considered to be lousy. In the '80s and '90s, shareholder-friendliness became the mantra here, and I think it got taken to extremes. But there's still an excessive focus here on earnings per share, at the expense of creating shareholder value.
For non-U.S. markets, such obvious things as disclosure and accounting standards have converged with those of the U.S. over the past ten to 12 years, and you could argue that International Accounting Standards are actually better than U.S. GAAP [Generally Accepted Accounting Principles]. Disclosure is now at a reasonable level around the world; that's certainly the case in developed markets. In emerging markets, you could have better disclosure.
But attitudes toward shareholders have changed dramatically in all markets. I think there's been recognition -- maybe even more in the emerging markets -- that if management is given incentives to create shareholder value, the market will actually reward that, resulting in the stock trading at a premium. So good corporate governance gets you a premium stock price.