Why would an investor buy international growth stocks in 2012 after an abysmal year in developed and emerging markets? Thornburg Investment's Alex Motola, who has made investors money where others have failed, has a few reasons.
By all accounts, 2011 will go down as a miserable year for international equities. In developed markets such as France, Germany, Japan and Italy, stock-market indices are down between 17 percent and 28 percent this year. In emerging markets like China, Brazil, Argentina and Chile, the losses are as high as 30 percent. The S&P 500 Index of the biggest U.S. stocks is down only 5 percent in a record year for volatility.
Motola, manager of the Thornburg International Growth Fund , argues that investors looking ahead to 2012 should consider international growth stocks because of the broad range of opportunities compared to the U.S. stock market.
"There are 500 stocks in the S&P 500 with about half in the growth category and half in value," Motola points out. "On the other hand, I have a universe of about 20,000 names before you separate the growth out. That gives me about 8,000 stocks to run through. It gives me that much more opportunity to find stuff. Half the names in our portfolio people have never heard of. I want to find the best 40."
Helped by his broader mandate, Motola's fund has been able to notch solid performance as it nears the five-year anniversary for the fund in February. Through Oct. 31, the Thornburg International Growth Fund has outpaced its benchmark, the MSCI All-Country Index (excluding U.S. growth), by a wide margin over almost every time period. A hypothetical $10,000 invested at the fund's inception would be worth $11,230 as of Sept. 30, compared with $8,453 for the benchmark index.
Motola says that the fund's outperformance has been driven by companies off the beaten path, many of which are based in Europe. The euro zone's ongoing debtcrisis has torpedoed equities overseas, but Motola and his team at Thornburg have still managed to outperform.
"We've made money in Italy and Germany," he says proudly. "At the macro level, you don't see any growth opportunities. You aren't going to run out and buy Spain. But in our case, we're concentrated in growth, so we buy stuff that isn't correlated to the overall macro. We have a pretty good exposure to the U.K. We own stuff in Spain, Germany and France. If you're selective, you can do OK, but you're finding more of a headwind."
With a degree in medieval history, Motola is aware of dramatic changes that happened in Europe's history. What worries him is that the euro could be in a different situation in three weeks, whereas trends in Europe tend to play out over hundreds of years.
Motola notes that investors are held hostage by Europe's debt crisis for the foreseeable future, which dominates planning portfolios for 2012. But in the next year, Motola expects to see more interest in emerging markets that haven't received much attention.
"There's a lot of focus on China and Brazil, but India and some of the less appreciated markets will start to capture investors' imagination," Motola says. "There are reasons to be pretty positive. Indonesia has a young population. Places like that will be attractive."
Motola takes pride in that his fund traffics in areas that are off the beaten path. The $265 million fund, which is rated the highest of five stars by Morningstar, has its biggest exposure to the U.K. (22 percent), China (10 percent), Germany (8.3 percent), Japan (8.2 percent) and Ireland (6.2 percent). In terms of market value, the fund has more than 47 percent in small-cap stocks and 33 percent in large-cap names. In terms of composition, the portfolio has 33 percent in emerging growth names and the same amount in growth industry leaders.
Motola offers up four international growth stock picks owned in the Thornburg International Growth Fund with commentary on why these names could outperform in 2012, which are detailed on the following pages.
Company Profile: Orpea, founded in 1989, is one of the major providers of long-term health care in France. The nursing home company is a leader in France with 36,714 authorized beds at 394 locations.
Current Share Price: 24.45 euros (Nov. 28)
Motola's Take: Motola concedes that the idea of France and nursing homes doesn't sound like a great combination. But he adds that France's government clearly can't afford to address a shortfall for nursing homes.
"Here is one of the handful of players in France in an industry that is slowly consolidating," Motola says. "It's not our favorite business model in the world but it's pretty attractive. It's a case where austerity is working in your favor. There's a demand that needs to be met."
While the fund specializes in growth stocks, Motola says this is one potential growth name that also provides a little stability in the portfolio.
"We know how many beds are in their pipeline. We know what the mix is. We know what the revenue looks like," he says.
Company Profile: Zooplus is a Germany-based Internet company that sells over 7,000 pet supply products that are shipped directly to customers.
Current Share Price: 49.93 euros (Nov. 28)
Motola's Take: Investors will probably raise an eyebrow when they hear Motola say that Zooplus "is essentially the Pets.com of Europe," a reference to the high-profile blowup of the dot-com area.
Like Pets.com, Zooplus was also founded in the late 1990s. But while Pets.com collapsed without available capital, Zooplus has continued to thrive in Europe.
"In the past decade, broadband penetration has improved significantly, as has willingness to buy online," Motola says. "Zooplus has been growing revenues about 30 percent, and is has a model built for scale. That revenue should turn into highly levered profit growth in the near term."
Motola notes that the market for pet supply products is large at more than $40 billion per year. Depending on the geography, Zooplus has about 70 percent or more of the online market share.
"Europeans are increasingly moving away from the daily shopping paradigm, and convenience and selection are compelling," Motola adds.
Company Profile: Hargreaves Landsdown is one of the U.K.'s leading independent financial service providers and asset management specialists.
Current Share Price: 444.12 GBP (Nov. 28)
Motola's Take: Motola likes Hargreaves because the company services the do-it-yourself market, like retail investors too small for the advisor market, with a mutual fund platform.
"This is important because the U.K. is undergoing a sea change similar to what happened in the US about 15 years ago — the move from defined benefit to defined contribution," Motola says.
Therefore, there is a large and growing asset base whose needs are not being addressed, Motola says. While he expects competition to increase over time, "Hargreaves has little direct competition at the moment. The business is growing revenues well in excess of 20 percent and it trades at a very attractive valuation."
Company Profile: Yoox SpA is an Italy-based Internet company that specializes in high-end fashion and design brands.
Current Share Price: 9.20 euros (Nov. 28)
Motola's Take: Motola is impressed with Yoox's customer list, which includes a who's who of European design houses: Prada, Armani, and Marni, among many others.
"Yoox understands the fashion business, and is uniquely capable of answering the needs of their clients, making entry barriers quite high," Motola says.
Around 20 percent of revenues come from Italy itself, with the rest of Europe representing almost half, Motola points out. Yoox also continues to grow by taking a larger percentage of online sales, adding new customers and adding new geographies.
"When Yoox adds a new geographies, many of the their existing customers 'opt-in,' extending their value and their reach," Motola says.
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