The theme of corporate restructuring is putting zip into the performances of non-U.S. investments.
Across Europe, in parts of Latin America and modestly in Asia, companies have caught the downsizing wave or are trimming costs and focusing on core businesses in other ways. This shedding is firing up stock prices of participating companies, amid expectations of much higher profits.
In the first half of 1997, the performance of Spain's Puleva Union Industrial y Agro, a dairy company considered a restructuring story, leapt 136.7% in U.S dollar terms, making it the best performer in the universe of Birinyi Associates, Greenwich, Conn. Benefiting from the same theme, the stock of Germany's Volkswagen AG soared 98.3% in dollars in the first half of the year, while Mexico's Vitro S.A. was up 105.9% and the Netherland's Philips Electronics N.V. gained 88.8%.
Such gains reflect the profit improvement that restructuring has helped bring. For example, "in Germany this year, GDP growth is only expected to be 1.5% to 2%, while corporate profits should grow an average of 20%," said Paul H. Drexler, vice president and portfolio manager of international equities, Loomis, Sayles & Co. In France, corporate profits should rise an average of 36%, vs. about 2% to 2.5% for local GDP growth, and in Spain, profits should grow 19%, compared with GDP growth of about 2.2% this year, he said.
The trend has become hard for managers to ignore. For example, Mr. Drexler estimated more than half of the holdings in his non-U.S. portfolio are restructuring stories, which have been "significant to performance."
For the year ended June 30, he said his portfolio was up 20% vs. 12.8% for the Morgan Stanley Capital International Europe Australasia Far East Index.
Among the winners in his portfolio are Merita Bank in Finland, whose price roughly doubled in the last six months, and Porsche AG in Germany, whose share price about doubled in the six to seven months that he has owned it.
For portfolio manager Todd Marvin of Marvin & Palmer Associates, Wilmington, Del., restructuring has become a "dominant" investment theme internationally. "It should continue to be a key theme for years to come," he said.
Fully 75% to 80% of the firm's non-U.S. stock holdings have some restructuring element to them, with some of the firm's better-performing stocks this year including Rhone-Poulenc, Novartis and Royal Dutch Petroleum Co., and last year, Germany's Bayer AG.
In the six months ended June 30, the stock price in local currency terms of Royal Dutch Petroleum jumped some 40%, while Rhone-Poulenc's gained about 50% and Novartis' jumped more than 60%.
And evidently, such gains helped the firm outperform.
In the six months ended June 30, Marvin & Palmer's broad international (EAFE-type) portfolios gained 17.5% vs. 11.2% for the EAFE index; for the year ended June 30, the firm's EAFE-type portfolios advanced 20.7%, compared with the EAFE's 12.8%, Mr. Marvin said.
The trend "really affects" the core international group of Putnam Investments, Boston, said Omid Kamshad, senior portfolio manager.
"Our main goal is to find undervalued companies without any style bias. . . . And because of the sheer amount of restructuring now (especially in Europe) . . . we see many companies are making a leap upward in terms of their average midcycle return on capital and return on equity," he said.
Fully 62% of Putnam's EAFE portfolios are invested in Europe, and of that portion, roughly about half of the stocks fall into the restructuring theme, Mr. Kamshad said.
The firm's EAFE portfolios have such now-familiar restructuring participants as Novartis in Switzerland, Philips Electronics and France's Elf Aquitaine and Total S.A.
And in Japan - where corporate restructuring is still embryonic - Putnam likes Sony Corp. and Canon Inc., which have been "giving management all kinds of incentives and restructuring underperforming assets," said Mr. Kamshad.
For the year ended June 30, Putnam's international equity composite was up 25.59%, well above EAFE's 12.8%. For the six months ended June 30, the composite gained 16.4%, compared with 11.2% for EAFE.
In the European portfolios of Scottish Widows Investment Management Ltd., Edinburgh, restructuring has been a "major contributor to performance," said Albert Morillo, the firm's European equities head.
In fact, he feels managers who have "not held stocks of this sort have probably seen their performance suffer."
Among Scottish Widows' high-powered holdings are Philips Electronics, Electrolux AB, Daimler-Benz AG and Alcatel Alsthom.
Of course, restructuring had caught on in the United States well before its spread to Europe and beyond.
The competitive advantages it gave U.S. companies appear to have helped trigger restructuring abroad.
As Putnam's Mr. Kamshad describes, non-U.S. companies have chosen to restructure for three main reasons: reduced competitiveness and loss of market share around the world; pressure from stockholders to improve shareholder value; and the growing use of share options and equity ownership as part of compensation - which fuels internal interest in a company's stock price.
These motives have produced three types of restructuring: operational, which involves bringing down costs; organizational, in which companies start to focus on core businesses that are their strengths; and financial, in which companies find the right debt and equity levels for their needs, and which can lead to share buyback programs.
Such moves have been gaining steam abroad in the past one to two years.
And as far as Mr. Kamshad is concerned, "the more global the company, the more advanced it usually is" in the process.
Money managers do, however, warn that a fair number of companies have promised restructuring moves but not delivered so far.
Among the companies managers cite as disappointing are PSA Peugeot Citroen in France and Olivetti S.p.A. in Italy.
Thus far, much of the focus on restructuring has centered on Europe.
But Tom Tull, managing director of Gulfstream Global Investors, Dallas, said restructuring also has been under way in Latin America and should spread to the Association of South East Asian Nations countries - eventually making it a broad emerging markets phenomenon as well as a trend in more developed lands.
Mr. Tull said that "since the tequila debacle" starting with the Mexican peso crisis of the mid-1990s, "we're seen tremendous restructuring in the Latin American region."
More Latin companies are coming to grips with political and economic changes, including a less inflationary environment.
In Mexico, companies involved in restructuring have included such prominent names as Vitro, Grupo Carso S.A. de C.V. and Cemex S.A. de C.V.
Over time, restructuring seems likely to spread to other emerging regions.
For example, because parts of Southeast Asia have been afflicted with economic problems of late, "a lot of companies (in this region) have lost their competitive edge. As a result, they talk about wanting higher value-added products, because they are being forced to do so," Mr. Tull said.
Thus, companies will have to spend sizable amounts to modernize. And perhaps some companies will have to move operations offshore.
"All this won't happen overnight," he said, "but it could bring a change in the way people invest in emerging markets."