P&I: Dick, what are your weightings?
MR. SNIJDERS: Out of our total 26 billion guilders, we have aneutral position of 40% in equity. That brings us to the position of about 11 billion guilders. Neutral would be a fifth in United States and Canada, and today we have something like 14%, so, we are underweighted.
MR. MCFARLANE: Two answers: GAM's global portfolio is run for its private client business. We have about a 20% allocation to U.S. equity markets, but that portfolio would have some bonds in it and also some non-equity strategies. If you stripped it down to equities, the U.S. is well up toward three-quarters of its allocation. In the global fund we would offer U.S. retirement plans, what we call our Global Opportunities Fund, we actually have increased the U.S. allocation and it is nudging up toward 40% now.
P&I: Nilly, what are your weightings?
MS. SIKORSKY: I think we are maybe 10% to 15% underweighted in the U.S. now, between 35% and 38% as opposed to 43%, but we are way overweighted in Canada. So North America would be about at that weight.
The reason for the underweighting in the U.S. is very much what you were saying earlier on. Many more companies in Europe are attractively valued at the moment. Also I think some concern about the major multinationals is a big weight on the (U.S.) market, because we are not sure people have factored into earnings estimates the strength of the dollar. If you have significant strength in the dollar for corporate earnings, you will not just be sluggish, as most people say. They could be slightly down.
P&I: Allan, are you over- or underweighted?
MR. MCKENZIE: We have been underweighted in the U.S. for some time. For U.K. pension funds, we are just under 21/2%, so about 600 million pounds out of, say, 24 billion pounds. And for our global discretionary equity portfolio, we are around 16% in U.S. equities.
I guess our current exposure to U.S. equities is as low as we have ever been, and the big worry is we are missing something.
MR. BUCKLEY: Going back to earnings, the outlook for U.S. earnings is single-digit growth at best and Nilly was just talking about flat, and yet investors are paying 18 times for those earnings. If you look around the world, there is a lot better earnings growth to be got and there is a lot cheaper price to be paid. So that, to me, lends weight to this valuation argument that U.S. equities are stretched.
P&I: Large-cap stocks are dominating the U.S. right now. Have you any projections where interest is going to lie next year? You seem to think, Allan, it is the large growth companies with pricing power.
MR. MCKENZIE: That is consistent with our view of what is going to happen in the market and in the earnings question mark.
P&I: Does anybody disagree with Allan's view? Nilly?
MS. SIKORSKY: Yes, because I think the large companies have not performed now for many, many years and they give you yields, an earning yield of 3% to 5%, and they are the most vulnerable to change in currency relationships. We like those where we get a lot of top-line profit and involvement in the emerging markets. But I think big-cap and small-cap and high-tech would do very well.
P&I: Would you like to disagree with that, Alan?
MR. MCFARLANE: One of the strange things is that if a bond market is signaling very low inflation and deflation, that can actually be quite bad for equities because the vast majority of companies are not price leaders and do not have the opportunity to determine their own future to that extent. I think, whether large or small, we have tried to approach it on the basis of: Are we getting into businesses which have a higher degree of control than the average over their pricing and distribution and so on?
P&I: What is your view on Europe now, Alan? Perhaps you can briefly expand on it. Where are the strongest prospects for growth and the weakest in the European economies, European markets and European stocks?
MR. MCFARLANE: Europe has been a very good place to invest for a number of years.
The Morgan Stanley Capital International Europe Index compares very favorably with the S&P 500 over 10 or 12 years. It has lagged in the last two or three years because Wall Street has been soaring, but you have funded your liabilities from investing in Europe. We think that is probably going to continue.
Our approach to Europe is that the DAX 30 or the CAC 40 tend to represent narrow entrances that do not really represent the underlying economies of those countries and, therefore, there are good stocks to be found. So it is the quality of the businesses that attracts us to Europe.
We were initially very cynical about the corporate restructuring story. We thought it was merely a new script given to the PR departments of many companies. We have now seen tangible evidence in a number of cases that people mean business about shareholder value and restructuring their organizations. That is very exciting. So, for us, the key to 1997 is good quality stock picking based on fundamentals and also picking some businesses that will benefit from those trends - not country specific, but corporate specific. (contd.)