International value investing had a sharp resurgence in the fourth quarter, as international value stock managers reported positive results and institutional investors began showing stronger interest in the asset class.
A number of indicators pointed to a resurgence of the international value style:
* UBS Asset Management, London, and subsidiaries Phillips & Drew, London, and Brinson Partners, Chicago, which had reported dismal results earlier in the year and were losing clients by the bushel, reported positive results for their international value strategies in the fourth quarter and the year and began getting new clients, including the Alaska Permanent Fund Corp., Juneau.
* The Ontario Teachers' Pension Plan's equity holdings got a boost from the international value portfolios they had set up earlier in the year. "In our conversations during the fourth quarter, people said that part of our good results came from the value side of our investments, including international," said Leo de Bever, senior vice president of the C$73 billion (US$48 billion) Toronto-based fund.
* At Ivy Funds, Boca Raton, Fla., the $130 million International Value Fund was up 2.5% in the fourth quarter, even though it did post an 8.2% loss for the full year.
* Polaris Capital Management, Boston, which has stuck with its value strategy during the growth stock frenzy, had a 1% return in the fourth quarter for its international value fund, although it was down 7% for the year.
All of these managers beat the Morgan Stanley Capital International Europe Australasia Far East index, which was down about 15% for the year and 2.68% for the quarter.
Thomas Madson, head of equity investments at value manager UBS Asset, said that in the fourth quarter, the firm's global ex-U.S. portfolio was up 6%, while its European equities portfolio was up 7% for the quarter.
"Since Nov. 1, (value investing) has really exploded on the upside across the board," he said.
The Alaska Permanent Fund in December transferred $300 million to Brinson Partners, putting 40% of it in its international portfolio, from Ark Asset Management, which had managed the money in domestic value.
Among the value stocks that have helped UBS, Mr. Madson said, are: Diageo PLC, a London-based food and drinks firm that had a 47% rise in its stock in 2000 but was still selling only around 18 times earnings; R M C Group PLC, a U.K. cement company whose stock was selling at 25% below its net asset value; and Group Danone SA, a French company that makes yogurt and Evian water, which was selling at 20 times earnings early in 2000 and ended the year selling at 30 times earnings.
Ivy Funds Chief Investment Officer Sheridan Riley said, "As the sell-off in tech stocks continued (during 2000), investors were more prone to turn toward defensive names. We saw investors move into more traditional value stocks. We particularly enjoyed a shifting of investors into defensive value stocks in the fourth quarter."
Ivy runs a $130 million international value fund.
Several stocks Ivy owns did particularly well in the fourth quarter. Among them were: French liquor company Pernod Ricard, which was trading at e51 ($48) in October and climbed to e74 by the end of the year; German athletic shoe company Adidas-Salomon AG, which traded at e55 in August and finished the year at e67; and Rolls Royce PLC, based in London, which fell to 170 pence ($2.55) in August and in the fourth quarter rose to 200 pence.
Looking for flow
Polaris President Bernard Horn said that he looks for companies with strong cash flow and that haven't been recognized by investors. "Trying to find the most undervalued streams of cash flow in the world is fundamental to my philosophy," he said.
Polaris manages $45 million in international value strategies, $30 million of which is from institutions.
In the fourth quarter, he invested in British company Lasno PLC, which was trading at 130 pence when Polaris purchased the stock. Then Amerada Hess Corp., New York, made a bid of 180 pence for the oil exploration company, which soon was topped by ENI of Italy, which made an all-cash bid of 200 pence per share for Lasno. The stock is now trading at 200 pence, indicating investors expect a higher price.
Other companies he likes include Seoul, Korea-based Samsung Electronics and Samsung SDI Co. Ltd., both of which are now trading at four times their estimated free cash flow.
In another sign of international value investing's improving fortunes, in June the Virginia Retirement System, Richmond, committed $230 million to a large-cap international value portfolio run by Sanford C. Bernstein & Co., New York.
Safa Muhtaseb, head of international investing at the $42 billion fund, said, "We wanted to get rid of the growth bias in our (international) portfolio."
Mr. Muhtaseb said the portfolio has done extremely well in the six months since its inception. "Because of its value bias, the portfolio has had lesser exposure to technology and telecommunications issues," he said, noting those areas were hard hit in the last half of the year.
Marc Gabelli, director of international investing for Gabelli Investments, Rye, N.Y., said the value style developed by his father, Mario, in the 1970s which looks at companies' asset values and cash flow and then looks for an event that can be a catalyst to a stock price rise, is working well in international investing now.
Capital gains effect
One company he likes is Munich Reinsurance Co. of Germany, which has about half of its market value in publicly traded securities and cross-holdings of other German companies.
With the elimination of the capital gains tax on all stock investments in Germany, it can sell the cross-holdings tax-free. "You're buying an insurance company cheap," said Mr. Gabelli.
He also likes DDI Corp., a Japanese company created by the merger of three telecommunications firms. "It's the cheapest major-market telephone company in the world," he said.
Hartswell Woodson, a senior vice president at Gabelli, added some more reasons for the success of international value investing.
"We like what's going on in Europe. As the euro strengthens again and Europe continues to grow as the U.S. economy slows down," he said, there should be some good opportunities for value investing.
Mr. Woodson also said that although Japan has "lots of problems," there are opportunities there as well as some companies undergo restructuring.