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Going big on value and growth

Jun 09 2011 00:00 Shaun Harris

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Invest offshore. That’s the message being hammered home to South African investors. And it makes sense to have an investment portfolio diversified offshore – but where? Mainly the United States, followed by Australia, Britain and Europe, according to two of the global funds managed by Franklin Templeton. What’s telling is the two fund managers have very different investment strategies.

Donald Huber, overall manager of the Franklin Global Growth Fund, is an unashamed growth investor. Just when you thought the last growth investors had morphed away during the last financial crisis, Huber is looking worldwide for large cap companies that will outperform, based on strong cash flows and market dominance.

Heather Arnold is in the opposite camp: a value-based investor who runs the Templeton Global Fund. Currently, she says she’s finding the “best bargains” in Europe, though it’s tricky navigating around the sovereign debt crises in some European countries.

But both portfolios have the largest proportion of investments in the US, reflecting opportunities in the wake of the securitisation fallout that shattered many companies there. However, there are clear signs of recovery, says Huber, with large cap companies coming out with financial results that surprise on the upside. Second largest region for investments in his fund is Australia, followed by Britain and Hong Kong.

Arnold’s second largest region is Britain, followed by France, Germany and the Netherlands. But buying large companies in Europe also means getting exposure to many other countries. “Take Vodafone as an example. It’s based in Europe but has large exposure to emerging markets. So we feel we’re getting emerging market growth at a developed market price.” But as a long-term investor she says the question is what will Europe look like in five years’ time.

Huber has a team of analysts looking at sectors, then companies in those sectors. “We only have two ratings: outperform and sell,” he says. His fund aims to achieve superior performance through holding a fairly concentrated portfolio of around 40 companies. “We’ve built a diversified portfolio to try and eliminate the overlap between underlying economic drivers.” The 40 or so companies in the portfolio have a roughly equal weighting of 2,5% to 3%. “That’s our real focus – on risk management. We don’t want too much exposure to any company at any stage.”

Huber defines large cap companies as those starting with US$2bn. “But we’ll generally buy companies with a lower than average market cap. The idea is that those companies will grow beyond $2bn. We look at all companies in all regions, but we don’t like conglomerates. Often the underlying businesses aren’t that visible.”

Arnold says her investments tend to be contra-cyclical. “We look at industries and companies in those industries and estimate what their normalised earnings would be when the economy lifts. Right now the companies might not be doing well but we know things will change. What we can’t tell you is when. What you’re really betting on as a value investor is time – that something better might happen at the company in the future.”

Both managers are long-term investors. But when do they sell companies out of the portfolios? “We sell when we think the company is approaching fair value, when the market becomes genuinely interested in the shares. Typically, we sell a bit early,” says Arnold.

Though Huber’s fund currently doesn’t hold any South African-based companies, that could change when he visits this country later in the year.

Harris was a guest of Franklin Templeton Investments at its global due diligence conference in Istanbul.
 
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