Morningstar Advisor - February/March 2010 - 39

soon, and in appraising the opportunity cost of our concentrated portfolio, we find few compelling investment opportunities in Japan. Lowenstein: Japanese stocks, other than the Moore: Banks, provided regulators do not once again do something stupid. I would stick with the U.S., as European regulators and politicians, in particular the U.K., cannot be trusted and see shareholders as a blight on society. Magellan Global: Our portfolio has a significant tilt—50%—toward non-discretionary multinational consumer franchises. We believe that the companies within our portfolio are likely to prosper almost irrespective of the growth outlook for the developed world. These firms are positioned to benefit from ongoing urbanization and substantial growth in the middle class over the next 10, 15, and 30 years. Gartside: The more important question is, banks, are undeniably cheap. Worries over sovereign debt are overdone for at least a decade. The currency will have to work hard to fall, given the strength of the external balances. The domestic economy is starting to bounce hard, and the export sector is adjusting fantastically to the yen strength, as it has done at regular intervals for the last 40 years. The missing piece of the picture is improved capital management at Japanese companies. And unlike the start of the rally in 2002-2006, which was marked by the emergence of agitators for change such as Murakami-san and Steel Partners, most Japanese small- and mid-cap managements now feel immune from external pressure to look after shareholder interests. But that may not be forever, and any change would probably light a rocket under the market. We are increasing our exposure even as most foreign investors seem to be capitulating. And because Japan is too big to ignore when it does recover, we expect to sell back to the same people when it does! Estabanell: It is very difficult to invest in Japan. Cartesio Inversiones: We believe we will be in a low-growth, low-interest-rate environment for several years. Defensive and GARP equities are very undervalued on that basis. KPN, Telefonica SES Global, Prosegur, BME, Pfizer PFE, and Vivendi VIVDY are some of our biggest positions. Estabanell: In fixed income, B/BB rated corporate bonds in defensive sectors offer a good risk/reward balance. You have to be selective with names, but companies that have not defaulted or been downgraded at this stage should be resilient. Prices do not offer the same opportunities as a few months ago, but living with 8.5% coupons for 2010 looks right to us. In equities, some small pharmas in Europe are attractively priced, and their P&L accounts are solid despite the environment. They have not followed the rally since last March. They could have been forgotten by the market. Their balance sheets are strong and could be rerated when risk appetite stabilizes. Strauss: Having stated our views on today’s slightly excessive valuations in developing markets, the coming wave of inflation into the global economy, and the search for highquality “real” assets, our highest long-term conviction ideas remain exposures to emerging markets and Japanese equities, as well as an exposure to gold. On a stock level, we think Naspers NPSNY, JBS SA, and MTN Group remain underappreciated by the market. Q. How are regulations that resulted from the crisis affecting the way you invest? Moore: The biggest problem facing markets today is the regulators. They are clueless, and we would all be better if they were removed. K Jackie Beard, director of fund research (United Kingdom); Chris Douglas, manager, fund analysis (Australia); Thomas Lancereau, director of fund analysis (France); Tim Murphy, manager, investment research (Australia); and Javier Saenz de Cenzano, director of fund research (Spain) contributed to this report. what’s our biggest worry? My answer would be deflation. I think this is a risk in the U.K., eurozone, and the U.S. I don’t think it’s likely to actually come about. Unlike some of my peers, I do have faith in U.S. policymakers. The last thing they want to do is imperil an economic recovery. I think they’ll do everything possible to make sure a recovery is kept on track, and this probably means they won’t increase interest rates until they absolutely have to. Lowenstein: Not withstanding our lack of confidence on corporate governance improvements, Japan does seem ready for its turn in the sun. Indian banks are still much too cheap given their risk/return potential. Some U.S. tech stocks look cheap. Gold is probably still only in the earliest part of a long-term bull market. And some government bonds are probably good shorts, especially U.K. gilts. Iturriaga: The value that small- and mid-cap companies are offering is huge. Many of these companies went off institutional investors’ and sell-side analysts’ radars. Within this area, I would focus on sectors with better momentum, such as those exposed to emerging markets, industrials, or the “government funded” cycle—in short, those stocks that performed well in 2009, excluding financials. A company that fits these criteria is the Spanish stock Tubos Reunidos. You have to be there for a very long time to not miss the good year. The recovery is on the right track, but we have seen in the past that despite looking vigorous it is vulnerable. A cheap yen and a growing Asia would help the recovery. Strauss: We think the developed world is going through what Japan already did 20 years ago. While the path to recovery will be quite different, we think the market still remains overly pessimistic in the ability of Japanese companies to create sustainable earnings growth and pass it on to their shareholders. We think it is worth having long-term exposure to this market. Q: What is your current highest-conviction investment idea? MorningstarAdvisor.com 39

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Morningstar Advisor - February/March 2010

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