International growth stocks are coming back into favor with institutional investors.
Their low valuations, along with a looming economic turnaround and portfolios that have become overweighted with value stocks, are causing money to flow into the asset class.
"Some of the more sophisticated plan sponsors are using value and growth styles within international investing," said Michael Forrester, executive vice president of sales and marketing at Fidelity Management Trust Co., Boston. During the past year, Fidelity won $2.1 billion in 14 new mandates for international growth, 10 of which were from new clients.
Mr. Forrester said that in the past five years, Fidelity's international growth strategy has outperformed the Morgan Stanley Capital International Europe Australasia Far East index by 500 basis points per year. Fidelity manages $8.6 billion in international equity and $2.7 billion in international growth.
"As soon as we could see the bottom in the fourth quarter of 2001, then growth began to outperform value," said Vincent Willyard, international growth portfolio manager for San Diego-based Duncan-Hurst Capital Management Inc. Duncan Hurst manages $130 million in international assets, all of it in international growth.
Mr. Willyard said that according to the Salomon Smith Barney World ex-U.S. Broad Market index, which he considers a more comprehensive measure of international stocks than the EAFE, international growth stocks have underperformed international value stocks by 28% from March 2000 through September 2001. "The outperformance of value (stocks) was greater than the outperformance of growth over value during the 1990s stock market bubble," he said. Now, a reversal should be imminent, he added.
Clients adding money
Jet Taylor, director of marketing at Sit/Kim International Investments, Minneapolis, said 16 of the firm's clients added money to its international growth portfolio in the last year, an increase of about $200 million. The firm has $1.6 billion in international growth, the only style it uses in international investing.
Pension funds that have added more money to international growth strategies include:
* Chevron Texaco Corp., San Francisco, which gave Fidelity $250 million of its $4.5 billion defined benefit plan to invest in its international growth fund;
* Orange County (Calif.) Employees Retirement System, which added $20 million to international growth strategies; the $4.6 billion fund invested $10 million with Sit/Kim and $10 million in Marvin & Palmer Associates Inc.'s international growth strategy;
* St. Joseph Health Systems, Orange, Calif., which invested $44 million out of its $670 million fund in international growth stocks with Sit/Kim;
* St. Lawrence University, Canton, N.Y., which invested $10 million of its $200 million endowment in Fidelity's international growth strategy;
* Sempra Energy, San Diego, which invested $40 million of its $3.7 billion pension fund in Duncan-Hurst's international growth strategy; and
* Kansas City (Mo.) Firefighters' Pension System, which invested $20 million of its $350 million fund in Fidelity's international growth strategy.
At Fidelity, William Fink oversees the entire international growth portfolio; there are three regional portfolio managers for Europe, the Pacific Basin excluding Japan and Japan who make stock selections for their regions.
The investors in these strategies are pleased with their choices.
"We're happy with what Fidelity is doing with their growth product," said Steve Winerman, investment strategist with Chevron Texaco. The decision to hire Fidelity came about as the company sought to "expand the international universe" of its pension fund after the merger with Texaco.
Farouki Majeed, chief investment officer of Orange County, said the fund was looking to rebalance when it committed more money to international growth in October. "Relative to value stocks, there might be relative gains in the growth area," he said.
Garret Karp, treasurer at St. Joseph Health Systems, said the fund believes "in an internationally diversified portfolio and we have a clearly defined allocation range." He said the fund wanted to keep its international allocation in balance when it added to its international growth investment with Sit/Kim and has been pleased with the return on its investment.
Kathryn Mullaney, vice president of finance and treasurer of St. Lawrence University, said the endowment did an asset allocation study and wanted to restructure its portfolio to add money in the international growth sector.
And R.G. Boersma, executive officer of the Kansas City Firefighters fund, said the fund was looking to add an international growth manager to add diversity to its manager lineup.