An All-Cap Foreign Manager

Neuberger Berman International Equity Fund

international > Multi-Cap > Growth

Aug 01, 2003
  • 52 Week HL
    23.45 - $17.97
  • Net Assets
    $326 M
  • Expense Ratio
  • Inception Date
    Nov 09, 2012

Q: I've done some checking on the holdings, and as far as style boxes go, you fit into the median-cap growth category which I found interesting from an international investment standpoint. A: We pay attention, but we don't live by the style boxes. We describe ourselves as an all-cap foreign manager now. At any given moment in time, we might be slightly more overweight the small caps and other periods the large caps. We have a mandate to buy companies where we find the value and the quality. Generally we tend to find more value and derive much more performance from the small- and mid-cap names in the portfolio. We're sometimes classified as growth and sometimes more as core. I think if you look at the top 10 names you won't find super growth. You certainly will never find any restructuring situations, commodity business, and deep value situations. We're certainly not a value manager. But we're probably more apt to be described as a core manager. I won't quibble too much about that. Q: The percentage of holdings tells me that although the bulk may be concentrated in mid cap, you do have small and even micro names. That tells me you do have an eye for growth on the international scene. A: We do find the best companies we can with strong management teams, strong margins, strong profitability and strong returns that are exceeding their cost of capital where one is growing and one is not. You probably want the one that's growing. What we also try to place as equal an emphasis on, is the value perspective so we don't overpay for growth. We won't be buying companies without profits. Q: From the make up of the holdings, you've made a big bet on Western Europe. Isn't it a weak region? A: Well, we've been overweight the Euro area for some time. To give you an overview of how we're invested, we're not a top-down macroeconomic driven investor. We're very much a bottom up. The weightings are very much driven by the bottom up decisions. We've been underweight the UK for some time. To compensate for the UK, we've been significantly overweight and had a long standing overweight in Ireland, which has the same currency as Western Europe, but is in many ways much more similar in culture to the UK. In the context of weightings in Europe overall, we've been underweight the core, Germany and the Benelux countries. We've been overweight Spain and Italy, some of the faster growing countries with more investment opportunities on the geographic periphery of Europe. Q: How about other regions? A: We're also underweight in Japan as we have been for a long time, versus our index. We find good companies there, but not enough to be 20% weighted in the Japanese market. We use that to fund our investments in Canada. We've found some tremendous companies that we like and profited from. A lot of people are enthusiastic about the Australian market. But we look at Canada as being driven by the same fundamentals as Australia, yet with better businesses, high quality companies and more attractive valuations. So, we’re overweight Canada, and the geographical periphery of Europe. We’re underweight Japan, UK and core Europe. Q: Comparing foreign indexes against the U.S., it seems the U.S. stock market made a rolling bottom between July and October 2002 and then made a retest in March 2003. It seems to me that the foreign exchanges that had been going down stopped declining at what amounts to a multi-year low. A: I think international markets have been hit by weak equity market sentiment in local terms. They have also been hateful of U.S. -based investors by a very strong dollar and correspondingly weak currencies elsewhere. That has started to turn around. A fair amount of confidence has returned to the equity markets. Clearly people are feeling much more confident about the outlook for currency and particularly the opportunity for interest rate cuts in Europe. The euro started as a currency in 2001 at $1.17 and got as low as 85 cents, a 30% devaluation in a very short period of time. I guess to some extent the devaluation had been overdone. It has been to international investors' benefit. Q: When we talk about stock price appreciation for this particular fund in U.S. dollars, has there actually been some further appreciation in terms of local currency? A: The local markets appreciated probably less than the U.S. markets appreciated. So if the U.S. markets were up 20% from the lows from mid-March and the local markets were up 10 to 15%, and you add the currency benefit onto the local market performance, you end up with a return that is superior to the U.S. market. We continue to believe that international stocks are fundamentally less expensive in local currency terms than their U.S. peers. Given that we expect ongoing weakness in the U.S. dollar, we also expect international equity investors to be rewarded twice. Q: There are some bond managers that take U.S. dollars and invest them into foreign bonds in order to take advantage of the U.S. dollar weakening. They get interest plus appreciation in the currency. A: I think we're expecting a similar sort of effect in the equity market. Q: When a U.S. investor places his dollars into the fund, what do you do with them in buying foreign companies? A: We have foreign exchange relationships. We're big fans of the Irish economy. If we find an attractive company in Ireland, we will take those U.S. dollars, we will convert them into euros and we will buy an Irish company. Let’s say the euro, as it is now, is about $1.20. One euro will buy you $1.20. If I take $120 from an investor, I can buy 100 euros with that. If I buy 100 euros in a share of an Irish company, which then goes up to 120 euros, then I've made a 20% gain in that local currency. If, in the meantime, the euro has strengthened so rather than being worth $1.20 it's worth $1.30, then from my 120 euros I'm going to get $1.30 dollars. I get the 20% local currency gain, plus the appreciation in the euro. So, I end up giving back to the investor $156 for a 30% gain. The 30% gain is comprised of 20% from the stock in Ireland plus 10% from the currency. Q: I'm sure the U.S. policy makers want to strengthen the dollar, but there is only so much they can do in an open market. A: Right. The dollar is certainly the most important currency. And, it's the greatest store of value in the world today. However, we do have a weak U.S. economy that looks to be rebounding. It has exhibited weakness over the last six months. It is still buying in more imports than exports, which is fundamentally weak for the dollar, as well as the fact the U.S. government is running a deficit. It leaves a significant amount of expenses the government is incurring, particularly with the war in Iraq and the war on terrorism. So, you've got the twin deficits of a government deficit and a current account deficit, which is fundamentally weak for the U.S. economy because it means it has relied historically on foreigners wanting to invest in the U.S. market. What we've seen over the last couple of years with these accounting scandals, etc., is that foreigners have very little incentive. People sitting in Paris, or in Tokyo, or in Toronto, thinking well, if I invest in U.S. Treasuries versus my own bonds, I'm going to get a lower return. If the currency isn’t going to do anything for me, why should I invest? So, they are not looking to buy U.S. assets. At the same time, the U.S. economy has significant deficits and a significant dependence on that outside capital. Even though the U.S. is the most valued currency, it can be weak for significant periods of time. Q: The U.S. has been in this situation before. A: In the mid-1980s, with the Reagan administration, there were significant deficits in the arms race with the Russians where you saw a significant dollar decline. Yes, we've looked at the history and drawn some parallels, although I don’t want to over blow it. But, it’s not unreasonable to think that the current situation is similar in many ways and therefore the weakness in the dollar may persist for a couple of years. But, currencies are like anything else, like markets in general. Sometimes they're weak and sometimes they're strong. If they were strong the last few years, they're probably going to be weak the next few years. Q: A glance of the fund holdings shows the trailing PE multiple is only slightly above the current S&P 500 multiple of 20, so you're not paying that much more of a premium. A: We're trying to buy the best companies. We're essentially paying a similar valuation to the overall U.S. market, but the companies we're buying internationally are going to be the best ones we can find. So, if the U.S. market is 20 times earnings historically, then the best companies are more like 25 or 30 times earnings. We're buying the Microsofts and some of their small-cap equivalents outside the United States. Q: The top holdings include Canadian energy stocks. Natural gas supplies are tight in the U.S. Is this believed to be a condition that will persist? A: There has been a tremendous shift over the past few years for environmental reasons as well as economic costs towards natural gas. That means the U.S. economy is now systematically consuming more natural gas than it ever did. The increasing U.S. demand for natural gas has to come from Canada and that's a tremendous benefit for them. We've been invested in those companies for quite some time. We bought Petro Canada, a combined oil and natural gas company between 27 and 28 Canadian dollars per share. The Canadian dollar has appreciated against the dollar. It's now at 55. We've more than doubled our money in that company over the past three years. Q: What about foreign pharmaceuticals? A: We’re at weight the drug makers. We're more overweight the products and services companies. We're invested in a hospital management firm in Australia. We're invested in Smith and Nephew, based in the UK, which makes artificial knees and hips. Trauma devices have been a rapidly growing market. Q: You have roughly 80 companies in the fund. What percentage of stocks does that represent? A: We count about 19,000 to 20,000 companies. Q: Your screening methods have to narrow that down. What is the average number that you watch constantly? A: We tend to keep our eyes on about 200 companies at any one moment in time. For every stock in the portfolio, there are one or two others that we're looking at. If the one in the portfolio appreciates, maybe we'll substitute that with one of the others. It's like an iceberg. Q: All portfolios sell for some reason. Yours is about 63%. Is that normal? A: As you know, markets have been fairly volatile, and we've been taking advantage of depressed price levels to load up on some stocks that we particularly like. When stocks get individually extended, we've been paring back. There has been a lot of trading around core positions of stocks in the portfolio and less straight substitution of individual names. Our style is not to blow into a company with a 2% weighting and then blow out again six months later. Our style is to take a 50, 75, 100 basis point position, add to it a little bit over time at attractive prices, sell some at other intervals at what we think are over extended prices, and manage the stocks in a much more incremental fashion. Q: Looking at the graph, the chart has leveled off in the last few months, despite the fear in the world; it's not the best time to think about selling short. A: I have a lot of friends in the hedge fund community and some of them take very strong views. Relative to where we were in the heyday of 1998 to 2000, I think the people looking to short have much less conviction over the positions they're taking. It's not as obvious that individual stocks are overvalued. We come off the highs. Who’s to say whether the U.S. economy is going to get slightly weaker or slightly stronger. I don't think anyone is arguing that it's gong to get much stronger or much weaker. So, the investment case of people looking to short - they certainly don't have the conviction that they would have had a year or two ago.

Annual Return

NBIIX 10.9 8.4 24.5 -16.4 27.2 -1.1 2.1 -1.9 18 18.8

in percentage

More Information

<300 characters

The history of the fund actually starts before it was established. The team came together at the end of 2003. Using the same strategy we employ today, we primarily managed institutional international and global equity portfolios.

The history of the fund actually starts before it was established. The team came together at the end of 2003. Using the same strategy we employ today, we primarily managed institutional international and global equity portfolios.