World Beater : How Foulkes Uses Growth Investor's Tools to Extraordinary Effect

L.A. Times Archives

Jan. 14, 1997 12 AM PT

International stock mutual funds have badly trailed U.S. stock funds, on average, over the last 15 years. But, of course, some funds are far above average. That describes the Vanguard International Growth fund, which under manager Richard Foulkes has achieved a 832% return over 15 years, well above the 575% return of the average international fund and better than the 696% return of the average U.S. fund.

In fact, Englishman Foulkes has steered the $5.5-billion fund to the best record of any international fund over the last 15 years, according to fund-tracker Lipper Analytical. The fund again beat the typical international fund in 1996.

In keeping with Vanguard’s penny-pinching tradition, the fund’s annual expense ratio is just 0.56%--roughly a full point below that of its average rival. Because expenses come straight out of returns, this gives Foulkes an automatic performance edge over rivals.

Foulkes, a 51-year-old lover of golf and opera, runs the fund from London, where he serves as chief investment officer at Schroder Capital Management. Russ Wiles, a mutual fund columnist for The Times, talked to him by telephone.

Times: Is it safe to say the fund is mostly focused on large stocks?

Foulkes: Increasingly, yes, although I buy a lot of medium-sized stocks too. In a $5.5-billion fund, you need a very good reason to believe that it’s worth building up a position that might not exceed $5 million in a small company. It would have to perform spectacularly well to impact returns in a fund that big.

It would be wrong to say I don’t buy small companies, but as the fund has gotten larger, the tendency has been to invest less in them.

Times: Do you consider yourself more a value investor or a growth investor?

Foulkes: I am a growth investor. I use the traditional tools of a growth investor.

Times: So you look for firms with robust sales and earnings gains?

Foulkes: Absolutely.

Times: What broad themes characterize your stock selections?

Foulkes: I’m always looking for companies that are well-managed. That’s a continuing theme. I would like to believe that if I left an investment in the portfolio, other things being equal, good management would deliver superior long-term performance.

When I’m playing restructuring themes, I’m very aware when a company with a large asset that’s being undermanaged brings in new top management. Those restructuring themes are very exciting, and they play a considerable part in my portfolio. I watch good management, and when I see them moving from one company to another, I’m extremely interested in buying shares of the new company.

Times: Which of your current holdings fit that description?

Foulkes: In terms of restructuring only, as opposed to new management moving in, I can cite Ciba-Geigy/Sandoz. You get enormous cost savings when major drug companies merge, as we saw with Upjohn and Pharmacia, Glaxo and Wellcome, and SmithKline and Beecham. This will feed through into dramatic profit growth over the next five years.

In the case of [Germany’s] Veba, new management came in three or four years ago and dramatically improved the return on capital employed. They’re changing Veba from an electricity-generating utility into a company with a large amount of capital employed in telecommunications.

Times: How do you evaluate management?

Foulkes: I listen to the plans that management set out, then I watch to see if they adhere to them. There’s nothing more exciting than knowing of somebody’s plans, then watching them deliver, year after year.

Times: Which specific countries do you favor now?

Foulkes: I have some large holdings in the Netherlands, where there are some outstandingly attractive companies. One favorite is ING, an insurance group with a banking subsidiary. This is the company that rescued Barings, if you remember. They’re on the cutting edge of getting things right in financial services.

I also have large Dutch positions in Philips [the electronics giant] and Heineken. The fund’s overall exposure to the Netherlands is about 13%, which is a very aggressive bet for a small country.

Times: Your largest single country weighting is Japan, where the market has been in a free fall lately. What is your strategy there?

Foulkes: My holdings are quite concentrated in Japan. I can’t find a large number of companies at which I believe management is truly in control of profits. It’s rare to have complete confidence in one or two people managing Japanese companies.

Japan weighs in at about 26% of the portfolio. After Takeda, the country’s largest pharmaceutical company, my largest Japanese holding is Fuji Photo, the competitor of Kodak. My third-largest holding is Ito-Yokado [a major retailer], another superbly run firm. Then comes Murata, an electronics company, and Bridgestone, the tire people. Those five holdings make up 40% of my Japanese exposure.

Times: How about emerging markets? Do you own much there?

Foulkes: About 7% of the portfolio is in emerging markets. If I was maximum bullish, I would invest about 10% in these countries. The best-placed companies in emerging markets are the ones with financial clout and experienced managers, usually trained in the States. Those are the companies I invest in, not the small, entrepreneurial firms that are difficult to keep tabs on.

Times: What’s your policy on hedging currencies?

Foulkes: We do a small amount of hedging, but it’s very difficult to add value from it. It’s much easier to add value picking the right stocks than trying to predict which way a currency is going. So we limit hedging to 15% of the value of the fund.

Times: Do you travel much?

Foulkes: I rarely go on the road. We’re very fortunate because almost all of the companies in the portfolio come to London to meet with us, one on one. This is an advantage of being a major investor.

Times: As an active portfolio manager, how do you like being associated with Vanguard--which of course is best known as a passive, index fund manager?

Foulkes: Since the launch of this fund, over most periods we have beaten the EAFE [Europe, Australia and Far East] stock index quite handsomely. I really enjoy beating the index funds at Vanguard. In a way, I’m making a statement--that good active management can systematically beat an index.

Times: Finally, foreign markets, on average, have lagged their U.S. counterpart for a long time. Do you see that changing any time soon?

Foulkes: These things flip-flop. There are times when U.S. stocks do better and times when international stocks do better. That’s one reason for being diversified. All one can point to is that the U.S. economy is operating at or very close to full capacity while most international economies are operating way below full capacity, which means that when growth finally picks up outside the States, we should have no fears about inflation or tighter monetary policies.

That combination of accelerating growth and relatively easy monetary policies is a very good one for markets. You haven’t got that scenario in the States, so one is bound to feel the U.S. is a riskier area to invest [now]. It’s about time for the U.S. market to underperform. I feel very confident about that.

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Vanguard International Growth Portfolio

Category: International stocks

Strategy: Seeks capital appreciation by investing in foreign stocks, primarily those of large, seasoned companies headquartered in developed nations.

VITAL STATISTICS

1996 return: +14.7 percent

5-year avg. annual return: +12.6 percent

15-year avg. annual return: +16 percent

Avg. international-fund return, 1996: +12.2 percent

Avg. annual international-fund return, 5 years: +10.4 percent

Avg. annual international-fund return, 15 years: +13.6 percent

Five largest holdings as of December: