These top fund managers and foreign-stock specialists thrived amid global upheaval. Find out how they did it — and where in the world they see opportunities.
- Fund: Causeway International Value Fund (CIVVX)
- Expenses: 1.24%
- Load: None
- Five-year returns: 18.2%
- 10-year returns: 8.2%
- Royal Dutch Shell (RDSA). The Hague-based energy conglomerate explores for, extracts, and refines oil, and Shell stations retail gasoline. That integration, and the steady income it generates, let RDS borrow relatively little to fund exploration. (Its debt-to-asset ratio is half that of its competitors, Ketterer says.) Shares took a hit recently after RDS missed earnings projections. But that's a near-term issue, she says. Plus, RDS plans to sell assets to free up cash for shareholders.
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- Technip (TKPPY). As offshore energy exploration grows in complexity, Paris-based Technip is one of only a few companies with the expertise to extract the oil, says Ketterer. It also designs and builds plants that will take advantage of the U.S. natural-gas revolution. So why isn't Technip trading at full value? Among other reasons, she says, the strong euro hurt the financial results of otherwise successful projects in Brazil, Nigeria, and Mexico.
- Vodafone (VOD). In a year when double-digit returns will be scarce and downside protection vital, every portfolio needs ballast. For Ketterer, that's Vodafone. The U.K. telecom giant is a cash cow, she says, that consistently increases dividends, makes smart acquisitions, and reinvests profits. With modest projected earnings growth of 2%, the stock doesn't have much upside, Ketterer acknowledges. But with rumors of an AT&T (T) takeover bid undergirding the share price, it's "play for preservation of capital."
Her strategy: Looking for beauty where others see beasts
Ketterer has a reputation as a hard-core contrarian. In early 2010, for example, she bought Toyota (TM) before headlines about its recall crisis had even abated. The stock has since doubled.
Ironically, though, it's a focus on limiting risk that leads Ketterer to such bold calls. Her team assigns a risk score to every stock, projects earnings, and simply buys those that offer the highest risk-adjusted return. Call that a contrarian approach, if you will, but Ketterer describes it more prosaically: "Our screening drives us to neglected or unpopular companies." Then she deploys another unglamorous weapon: patience — as the fading blemish slowly reveals a sound business.
The problem is, Ketterer says, global equity markets are at or near record highs. "We have to work harder to find undervaluation," she says. So Ketterer is focusing on energy and industrial companies. The market oversold those sectors in reaction to Asia's slowing growth, she says. China may have overheated, but in the long run it will continue to consume voraciously.
- Fund: Oakmark International (OAKIX)
- Expenses: 1.06%
- Load: None
- Five-year returns: 22.1%
- 10-year returns: 10.7%
- Credit Suisse (CS). Shares of all European banks have been shadowed by worries that post-crisis regulations will hurt profits. But the cloud hangs especially low over "too big to fail" institutions like Credit Suisse, Herro says, which are deemed most likely to be reined in. "People are overreacting." The bank has gathered plenty of capital to satisfy regulators, he says. And its thriving private and investment banking operations will help grow earnings 5% to 10% for several years to come.
- Daimler (DDAIF). To Herro, the German carmaker is a well-oiled machine with a full tank of gas — and investors are too focused on the scratched fender. "The market doesn't like its Europe exposure, the fact that it was behind in China, and that its margins have been lower than BMW's," he says. But Europe is on the mend. The company's once-struggling China operations are gaining traction. (Sales there are up 15% in the past year.) And a big push to streamline production has boosted margins.
- AMP (AMP.AX). Australia's largest standalone wealth management firm, says Herro, has a vast network of financial advisers poised to help folks navigate the country's compulsory retirement-savings system. Demand for such advice has grown since 2011, when the Reserve Bank of Australia cut interest rates, sending retirees scrambling for higher yields. But even with rates down to 2.5%, he says, Australia's central bankers have more ammunition to stimulate growth than their counterparts in the U.S., where rates are near zero.
His strategy: Still betting on Europe's recovery
At the height of 2012's European debt crisis, amid panicked headlines about Greek defaults and soaring Spanish borrowing rates, Herro believed a full-on banking collapse was unlikely. So he bet heavily on European financials. The sector is up 50% since then.
Indeed Herro, named Morningstar's international manager of the decade in 2010, has built his extraordinary record by ignoring conventional wisdom. He seeks strong companies selling at a discount because of what he sees as short-term or superficial problems. As he puts it, "We want to own what's cheap."
So why, despite the run-up, has Herro remained committed to European bank stocks, including his top four holdings? "There's still an undeserved stigma surrounding them," he says. His confidence extends to European carmakers, technology companies, and retailers as well. Virtually nothing, meanwhile, is invested directly in emerging markets. "It's too tough to find value there," he says. Likewise, Herro has unwound much of his fund's position in Japan now that economic stimulus has driven equities up by almost 75% in 13 months. For value beyond Europe? Look to Australia, he says.
- Fund: Artisan International (ARTIX)
- Expenses: 1.19%
- Load: None
- Five-year returns: 18.8%
- 10-year returns: 9.1%
- Unilever (UN). The Anglo-Dutch giant behind Axe, Ben & Jerry's, Dove, and dozens more aspirational brands was building supply chains into hard-to-access markets like Brazil and India long before most competitors. It'll cost loads to chip away at that market power. Meanwhile, the company generates so much cash — $5.7 billion in 2012, up 28% from 2011 — that it can continue extending that reach and grow dividends. Still, Yockey says, investors undervalue Unilever by as much as 25% because economic growth in emerging markets — where Unilever does 55% of sales — has fallen off the torrid pace of the last decade. But long term, he says, that's where the growth is.
- Linde (LNEGY). As one of the world's largest industrial gas companies, Linde is a veritable oligopolist. But Yockey thinks its potential in the emerging world is underappreciated. Growth there may have slowed a bit, but the urbanization boom has not — and Linde's gas products and engineering arm will play major roles in the inevitable infrastructure build-out. Plus, its strength in medical gases (like oxygen) will let it profit from aging populations in the developed world and surging demand for health care in developing markets.
- Baidu (BIDU). Known as the Chinese Google, Baidu dominates the online search market in the People's Republic. But only 44% of the citizenry have web access, vs. 79% in the U.S. And just a tiny slice of businesses buys search ads. That means room to grow, says Yockey. Some see a threat to Baidu in mobile advertising, where much of the industry's growth will be. But users will stick with Baidu as it invests in the category, says Yockey, who predicts that mobile search, just 4% of sales in 2012, will hit 36% by 2016 and boost earnings by 25% annually for "years to come."
His strategy: Seeking emerging-market heat without the burn
Europe is not burning, insists Mark Yockey, lead manager of the Artisan International Fund (ARTIX). Speaking to MONEY from a Barcelona hotel room, Yockey offers eyewitness proof that the continent, if not the very picture of economic health, has emerged from the apocalyptic haze of its sovereign debt crisis: "Construction is going on, and the shops are full," he says.
That's good news, of course, but not quite enough to bank on. Yockey, who favors steadily growing companies, doubts that Europe's tepid recovery will fuel robust profits anytime soon. But he says emerging economies aren't the answer either: Their faster growth often goes hand in hand with volatility, so he struggles to find enough companies that provide the consistency he likes.
The upshot is a kind of hybrid strategy that emphasizes large, stable European companies with a solid foothold in the developing world — or, as Yockey puts it, "emerging-market exposure without the risk."
He is looking in particular to leverage two linked demographic shifts taking place in many emerging markets: the dramatic growth of the middle class and increased urbanization. Those themes draw him to consumer product makers — especially those with well-known brands that resonate among middle-class consumers — and companies with a big role in developing urban infrastructure.
Marcus L. Smith
- Fund: USAA International (USIFX)
- Expenses: 1.21%
- Load: None
- Five-year returns: 15.8%
- 10-year returns: 8.7%
- Nestlé (NSRGY). The Swiss food and beverage maker, says Smith, grows "even in difficult times." The key ingredient? Pricing power. In regions where food safety is in question — emerging markets account for 43% of sales — the Nestlé logo is a "stamp of approval." As a result, Nestlé can raise prices ahead of growing raw materials costs and thus maintain healthy margins.
- Hennes & Mauritz (HNNMY). Long known for cheap runway knockoffs, the Swedish fashion retailer (better known as H&M) recently began emphasizing quality. But Smith says the makeover ran headlong into Europe's debt crisis. Those economic woes are receding, he feels, and new stores (350 in 2013) and the launch of a long-delayed U.S. website will boost sales.
- Samsung (SSNLF). Samsung is best known for selling flat-screen TVs and smartphones to consumers. But Smith says the Korean manufacturer's plan to target business users will yield substantial growth.
His strategy: Seeking steady growth from great global brands
Smith likes to sleep at night — and the erratic behavior of the fastest-growing companies has a way of jangling the nerves. So he looks instead for giant companies with healthy cash flows (which protects them in down markets) and a "growth driver" that, in his view, investors don't fully appreciate.
Right now he likes a handful of technology companies — even if "underappreciated" isn't a word associated with social media companies or the Internet these days. That's not true across the tech sector, argues Smith. He says companies that produce things like servers and other business hardware and technology infrastructure have "lagged the market" and are likely to catch up soon amid the shift from PC to mobile.
Like Artisan's (ARTIX) Yockey, Smith is also drawn to European consumer products companies for the exposure they offer the growing middle class in emerging markets. What's more, he says, the strong performance of several such companies was understated by the relative strength of the euro in 2013, which made earnings from abroad look smaller when brought back to the continent.