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Foreign Fund Concentrates on Best Bets

March 31, 1998|RUSS WILES | Russ Wiles is a mutual fund columnist for The Times

John Horseman was reaping big gains in foreign stocks when most of his peers weren't. He runs the $2.1-billion GAM International Fund, a foreign-stock portfolio that boasts an impressive 25% average annual gain over the last five years--a time when many markets outside the U.S. were supposed to be out of favor.

The success of GAM International can be attributed largely to the strictly focused--if somewhat idiosyncratic--approach followed by Horseman, who prefers to make big bets on a relatively small number of investment themes.

In making decisions, he and his London-based staff at Global Asset Management, a Bermuda-based investment firm that manages $11 billion in assets worldwide, first consider a region's economic picture, then narrow the field to a small number of favorable countries and industries. They then look for big companies selling at attractive valuations. And while the fund is usually invested in stocks, Horseman also has the leeway to switch assets into bonds or other investments.

Horseman, 40, is a London native who earned a bachelor's degree in economics and politics at the University of Birmingham. He broke into the money-management business in 1982 at NatWest Securities, then worked briefly at Bank of America Investment Management before joining GAM as a portfolio manager in its Hong Kong office in 1987.

Horseman, who has been managing GAM International and its smaller sibling, the $85-million GAM Global fund, since 1990, was interviewed by Russ Wiles, a mutual fund columnist for The Times.

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Times: GAM International ranks among a select few foreign funds in good performance in recent years. What's behind your numbers?

Horseman: One important aspect is having a focus, running a narrowly defined portfolio. There are 20-odd large international stock markets in which we can invest, and countless smaller ones. In theory, we could put upward of 8,000 stocks into the fund. Yet we hold on average only about 50 stocks. . . . Careful screening allows us to hone in on those opportunities that we think are particularly attractive.

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Times: Your total returns have generally been excellent, but there have been times when you've bounced from a superb year to a slightly subpar one, at least compared with international-fund benchmarks.

Horseman: [Because] we run a concentrated fund, it will fluctuate [more widely] against the averages. We don't personally pay a lot of attention to where we rank. We just try to keep earning attractive returns.

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Times: So your investors don't get anything resembling an index fund?

Horseman: No. During the 1990s, the [Morgan Stanley Capital International] Europe, Far East and Australia Index has been compounding at about 8%. If we had been a widely diversified and bland offering, we'd have that sort of performance.

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Times: How do you screen stocks?

Horseman: We do it on three levels. First, we look at countries. We eliminate those that are hostile to investing, especially in terms of high interest rates that don't look likely to fall imminently. Economic climate, thus, is the starting point.

After we have honed in on countries where we think interest rates are favorable and the economy looks OK, we start thinking about the industries we like. Do we want smokestack industries, growth industries or interest-rate-sensitive businesses? We're quite happy to maintain a high concentration in industries that look good, while avoiding others. Finally, we look at individual stocks, favoring those with high growth potential and selling at attractive valuations.

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Times: Which industries look good or bad at the moment?

Horseman: In Europe, where we have three-quarters of our money, we have a very low exposure to economically sensitive industries such as chemicals, autos, engineering and paper. Instead, we have high weightings in drugs, publishing, mobile telephony and other growth businesses, for which there are some excellent European companies.

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Times: Do you view yourself more as a growth manager or a value stock picker?

Horseman: It's fair to say we are both. For example, we have fairly high weightings in financial stocks--namely, European banking stocks. These typically sell at modest price-earnings ratios and are thought of as value stocks. But we [also] own drug companies, which are very growth-oriented.

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Times: What's an example of a company that epitomizes what you're looking for?

Horseman: National Express. It's the principal rail operator in the United Kingdom, the largest operator of commuter-train services. This is a regulated, predictable business, for which there's stable demand.

National Express underwent a long period in state ownership, so it has been rather rundown in terms of its investments. But we see a company with a clean balance sheet and one that has the opportunity to put money into the business and generate high returns from that investment. It's a company that, in a low-inflation world of predictable costs, can perform extremely well. Its earnings are growing by about 15% a year.

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