In the second of a two-part interview Brent Lynn, Janus Overseas manager and 2010 International-Stock Manager of the Year as chosen by Morningstar's US fund analysts, explains why he's reallocated some assets away from certain emerging-markets plays and into developed-markets names that are currently undervalued such as European and US financials. Catch up on the first part of this interview in Top Manager's Two Flavours of Growth Picks. View Janus Overseas' top 25 international holdings on Morningstar.com by clicking here (opens in new window).
Carlson: As you say, the fund has come back very strongly since the bear market. In fact, I think, if you look over the period from when the bear market started to now, the fund has actually outperformed just a vast number of its peers. In the face of that, in the face of the big rebound, how has the fund's positioning changed?
Lynn: In the course of 2009, I made a fairly significant reallocation from some of our emerging-market holdings that had performed pretty well into these special-situations types of companies that I had mentioned. And so, as India, Brazil, China markets bounce sharply in the first half of 2009, we still really like many of these companies, but the valuations no longer were quite as compelling.
And so, we took some profits there and reallocated to companies like Ford, like some of the airlines globally, and like some global financials in Europe and in the United States with Bank of America, where we felt that these companies were particularly unappreciated by the market, that there was underlying restructuring going on, and that the normalized earnings power was significantly higher than perhaps market forecasts.
Carlson: That reallocation process continued in 2010?
Lynn: Yes.
Carlson: So you've taken some money off the table in emerging markets, even though, as we've spoken about before, you still like the long-term growth profile of a lot of those markets, such as China.
Lynn: Absolutely, and I continue to believe that emerging countries like China, like India, are sort of the emerging economic powerhouses of the world. But it just happens that in terms of investments, I think many of the most exciting ideas happen to be in the developed markets.
Valuations in the U.S., in Japan, in Europe for many companies are at levels that imply that so many companies will have earnings and profitability at depressed levels for many years, and I just don't think that's the case.
Carlson: Maybe you could expand a little bit on that, particularly within, say, European financials, where a lot of people have macroeconomic concerns?
Lynn: Yes, and I certainly share these concerns. In peripheral Europe, in particular, countries like Greece, like Ireland, clearly, there are very, very significant, what I call, sovereign balance sheet problems.
But on a macro basis, what we've seen is, as a result of these issues in peripheral countries, many of the core European countries, countries like France, like Spain, have been forced to proactively now try to address long-term fiscal structural issues. While near term that may be painful, I think longer term it may end up positive for long-term economic growth on the European continent.
With regards to financials in these countries, what we've tried to do is invest in what we believe are extremely high-quality franchises with very sustainable and high normalized levels of earnings and deposit franchises where there is flight to quality when there is a crisis situation, and where these companies are trading, many of them below book value, which we think does not reflect their normalized return profile.
Carlson: So the profile of the fund has changed a bit. I think it shows that it's not just an emerging-markets play by any means and perhaps a little more diversified approach than some people might suspect.
Lynn: We're just looking for the most exciting investment opportunities around the world. I think that as markets shift, these opportunities also can shift.
Carlson: Thank you very much for your time today, Brent.
Lynn: Thank you very much.
