Investing in multinational companies is becoming an important theme for U.S. stock investing.
Previously, multinational investing was viewed as merely a safe way to play the international markets without having to invest abroad.
Growth stock managers in particular, along with some mutual funds, see it as a way to participate in global economic growth.
And merger mania may be adding to the attraction of the strategy. As powerhouse companies like Walt Disney Co. and Time Warner Inc. find merger partners, investors see that already strong players are determined to fortify their global positions. The recently announced pairing of America's Upjohn Co. and Sweden's Pharmacia AB underscores that trend.
Pat Regnier, an analyst with Morningstar Inc., Chicago, anecdotally has heard "more discussion of this issue this year" among money managers. Talk of a "soft landing" for the U.S. economy and the falling dollar earlier this year shed more light on the attractions of global markets, he said.
At U.S. Trust Co., New York, for example, portfolio manager Wendy Popowich reports growing interest in its $43 million Global Competitors fund.
"There have been huge inflows in this year alone. A lot of people are buying the fund because they can identify with it," she said.
Identifying the players
Among the players focusing on multinationals:
U.S. Trust's Global Competitors fund, which has grown by about 125% since the end of 1994.
L. Roy Papp & Associates, Phoenix, Ariz., through its $14.8 million Papp America Abroad fund;
G.T. Capital Management, San Francisco, through a $3.1 billion family of global theme funds launched in 1989. (These G.T. funds don't just invest in U.S. multinationals.)
Scudder, Stevens & Clark, New York, through a number of its funds, including the $1.25 billion Scudder Global. Scudder invests in multinationals around the world, not just in the United States.
Fidelity Investments, Boston, through its $482 million Fidelity Export Fund that invests in U.S. companies that derive 10% or more of their sales revenues from exports.
Globalt Inc., Atlanta, which invests in companies that derive at least 20% of their revenues from abroad. Typically, however, companies in the portfolio average more than 50% of revenue from overseas, said Angela Z. Allen, president. Assets under management now total $500 million, up from $1 million when it was formed in 1991.
The $5 billion domestic equity portfolios at New York's Bessemer Trust Co. have 75% to 80% invested in U.S. multinationals since mid-1994, said Stanley A. Nabi, Bessemer's chief economist and strategist.
Looking abroad for growth
Mr. Nabi said the United States has "1% population growth, 1% labor force growth, 2.5% real disposable income growth. With this you can't get vigorous long-term (economic and profits) growth from domestic sources. Accelerating growth has been taking place overseas."
He said the merger phenomenon comes into play because "many of these big companies find their growth slowing and attempt to accelerate it through mergers."
One example: the acquisition of Scott Paper Co. by Kimberly-Clark Corp.
"Although the growth rate of Kimberly-Clark has slowed somewhat over the last three years, the acquisition of Scott Paper (with its larger foreign exposure) opens the international door wider" for Kimberly-Clark, he believes.
In light of the mature U.S. economy, many growth stock managers have been looking to multinationals with broad foreign exposure - although this strategy might not be a deliberate theme.
Robert Turner, chief investment officer of Turner Investment Partners, Berwyn, Pa., doesn't invest in multinationals as a specific strategy. But "companies that can grow internationally have an advantage over those that can only grow domestically," he said. "We look at that issue, and I'd say many growth managers do the same."
Some of Turner's holdings with large non-U.S. exposure: Merck & Co., Sara Lee Corp., Eli Lilly Co., American Home Products, PepsiCo Inc. and Avon Products Inc.
For Globalt, intentionally investing in U.S. multinationals has paid off. For the five years ended June 30, Globalt posted a compound average return of 15.21% on its global large-capitalization stocks, compared with 12.09% by the Standard & Poor's 500 Stock Index, said Globalt's Ms. Allen. In that time, the Morgan Stanley Capital International World Index advanced 7.1% and the MSCI Europe Australasia Far East Index gained 4.69%, said Ms. Allen.
"We're only at the beginning of the time when billions of people are ascending economically. Their disposable income is increasing, and their ability to purchase goods and services is rising even as (these factors) plateau in the United States," Ms. Allen explained. Therefore, companies that address these opportunities abroad stand to outperform over the longer term, she suggested.
Perhaps even next year.
Marshall Acuff, portfolio strategist at Smith Barney Inc., New York, has devised an index of "global growers" that consists of 14 U.S.-based multinationals. In the past year or two, he has noticed that earnings growth of U.S. companies generally has been "competitive" with those in his index. But that trend should change in favor of the "global growers" as the U.S. economy slows.
For example, Smith Barney is forecasting corporate profits growth generally of 4% next year and about the same in 1997 - down from an expected 13% this year and 22% in 1994. But the profits of most "global growers" will exceed 4% - and some by a wide margin, predicted Mr. Acuff.
He forecasts earnings growth of McDonald's Corp. will average 16% over the next five years, and earnings growth of Intel Corp. will average 20% during that time. With slowed growth expected in the U.S. economy, such outperformers should "really catch on - like a Nifty 50 kind of thing," Mr. Acuff said.