Five Questions for Craig Scholl
We didn't come away from our talk with Craig Scholl, co-manager of the SSgA International Stock Selection fund, with any bold calls on the global market. In baseball parlance, Scholl and his three co-managers are singles hitters. They try to make money from individual stocks that they think are mispriced rather than from a major shift in investor sentiment toward, say, the Japanese market or technology stocks.
Scholl & Co. begin with a computerized ranking of about 2,000 developed-market stocks. They then select the ones they believe are the best in each sector, trying to closely match the country and sector holdings of the MSCI EAFE index. At the end of the day, the process is designed to produce modest but steady gains beyond those of the benchmark rather than big blowout years.
The strategy has been quietly effective. Over the past five years, the fund (symbol SSAIX) has returned 14% annualized, beating its benchmark, the MSCI EAFE Net Dividend index, by an average of two percentage points per year. We chatted with Scholl over breakfast recently in Manhattan.
KIPLINGER'S: Are there any countries or sectors in your portfolio that are more heavily weighted or less heavily weighted than normal?
So the world is in perfect balance? Our goal is to be well diversified. If there is a particularly compelling story, we'll be slightly more heavily weighted in that direction. But the value we are adding is through individual stock selection, not through country allocation or industry allocation. Right now, we really like French banks, so our financial stocks are dominated by French banks. We like Societe Generale, for example, because it has a great position in Eastern Europe. It also has an attractive balance sheet, and its earnings are not only consistent, but they're improving.
Do your investors have a difficult time understanding how you can make money for them by taking relatively small bets and sticking fairly close to your benchmark? Our view is that our clients are, by nature, looking for consistent performance. We could have a big overweight or underweight of Japan, for example. It's easy to create returns that way. It's easy to be right once, but it's hard to be right consistently.
The Federal Reserve has stopped increasing short-term interest rates for the moment, but central banks in Europe and Japan are still tightening. Since you don't pick stocks based on changes in broad economic conditions, how to you factor those conditions into your process? The different growth and economic environments really go to the bottom line of how each company is doing within its particular country. We are not going to use an interest rate call to overweight or underweight a stock, but we do understand how it's going to impact specific companies, and we use that within our investment process. It is factored into the earnings outlook portion of our quantitative model.
Is investing internationally still necessary? Don't U.S. and foreign stocks tend to rise and fall together more than they used to? In periods of crisis, markets are going to trade together. But over longer periods of time, we still see the value of diversification. The dollar is under pressure, and there's a threat of recession next year. Europe has more attractive investment opportunities and certainly better valuations right now than the U.S. And Asian growth, even though it has slowed down a little bit, is still strong. Even if U.S. and foreign stocks are increasingly correlated, it doesn't take away the need to invest outside the U.S., particularly at this point in time.