The modest rise in international growth stocks in the fourth quarter, after almost three years of dismal returns, has investment managers hoping a turnaround is finally at hand.
The Morgan Stanley Capital International Europe Australasia Far East Growth index rose 5.98% for the fourth quarter of 2002, just slightly less than the full EAFE's 6.5% return.
"The companies were really oversold, especially in the TMT (telecommunications, media and technology) area," said Nick Reid, a senior investment manager at Gartmore Investment Management PLC, London. "Last quarter, they did have a renewal of confidence."
Several pension funds made new commitments to international growth stocks in the fourth quarter:
* The Pennsylvania State Employees' Retirement System, Harrisburg, committed approximately $350 million to Artisan Partners LP, San Francisco, to manage an international growth stock portfolio for the $21 billion pension fund;
* American Airlines committed $200 million from its pilots' $2.5 billion money purchase supplemental defined contribution plan to two international large-cap growth managers;
* El Paso (Texas) Firemen & Policemen's Pension Fund committed $27 million to an active international large cap growth manager, Fidelity Management Trust Co.; and
* Hartford (Conn.) Municipal Employees' Pension Plan committed $25 million to an international small-cap and midcap international growth fund run by Arnhold & S. Bleichroeder, New York.
AMR makes investments
William F. Quinn, president of AMR Investment Services Inc., Fort Worth, Texas, which oversees all the American Airlines pension funds, said AMR will invest $100 million with Jarislowsky Fraser Inc., Montreal, and $100 million with MFS Investment Management Inc., Boston. He said plan officials used large-cap growth stocks because they wanted less tracking error against the funds' EAFE benchmark; there was already an international value investment in the portfolio, and they wanted to balance it with out. But Mr. Quinn also thinks active management can add value, especially in international investing, where he said it can add 200 to 300 basis points a year in returns - which is why he wouldn't just use an index fund.
Managers say international growth stocks started looking attractive in the fourth quarter.
"By the fourth quarter (of 2002), most of the excess had been rung out," said Svein Backer, portfolio strategist for the Driehaus International Growth Fund, a product of Driehaus Capital Management Inc., Chicago. "The valuations reached levels that investors can live with," he added.
"There were pockets of growth in Europe, including Eastern Europe," said Ivo Kovachev, co-portfolio manager of the fund. And growth companies in some Western European countries such as Ireland, Spain and Italy also began to perform well in the quarter.
Now, however, the prospect of war in Iraq is a "big impediment" to the international stock markets.
Low interest, high growth
Mr. Kovachev said the European Union set interest rates low - about 2.5% - because its two biggest members in terms of economic size, Germany and France, were experiencing slow economic growth. The economies of Ireland, Spain and Italy were growing faster.
"You're getting low interest rates and high growth rates in Ireland," said Mr. Backer.
There were pockets of growth in Asia as well. He cited some commodity-related companies, rapidly growing Chinese companies whose stocks are traded in Hong Kong, and some natural resource companies in Australia that all performed well.
Some of the stocks Mr. Kovachev and Mr. Backer like include VimpelCom, a telecommunications company based in Moscow; OTP Inc., the largest bank in Budapest; Centerpulse, a medical technology company in Zurich; and British Sky Broadcasting Group PLC, London.
Among international growth stocks, "technology, telecom services firms and financial services companies are doing much better," said Sheila Hartnett-Devlin, executive vice president and chief global strategist for Fiduciary Trust Co. International, New York. There was a rally in international technology and telecommunications stocks "among names that had been badly beaten down."
Ms. Hartnett-Devlin also pointed out that the relative dividend yield on international growth stocks is closer to that of international value stocks now.
She expects a consolidation in the international financial services sector, including banks in Europe and Japan, which should lead to more stock market gains. "There's room for growth there," she said.
Ms. Hartnett-Devlin also expects telecommunications services and technology companies to continue to perform better because equipment needs to be upgraded as new technologies become available.
Three companies Ms. Hartnett-Devlin likes are SAP AG, a German software company; Sage Group PLC, a London-based software company; and Yukos, a small Russian oil company.
Bill Fink, a portfolio manager at Fidelity Management Trust Co., Boston, said he thinks "the period where value is outperforming growth (appears to be) coming to an end."
He said technology stocks in the Pacific Basin and technology and telecommunications stocks in Europe were showing improved returns. Also, many of the European telecommunications companies "have begun to resurrect their balance sheets."
Mr. Fink added that "longer-term, as they sell off some of their assets and raise equity, there will be some investment opportunities with these stocks." He declined to name any specific stocks.