Robert W. Smith is a portfolio manager at T. Rowe Price. He became manager of T. Rowe Price International Stock (PRITX) in 2007 after managing T. Rowe Price Growth Stock (PRGFX) for 10 years. Both these funds are not available for sale in the UK. Smith recently answered our questions on investing in emerging markets despite threats of inflation and he discussed why he focuses on a stock's long-term performance.
1. You've been a fan of emerging markets for years, and your fund has a much higher weighting toward emerging markets than many of your peers. What about these economies and stocks are attractive to you?
Our approach to investing is based on the assumption that stock prices move with earnings and cash-flow growth. We are bottom-up stock-pickers, focused on buying high-quality growth companies that have a competitive advantage in their markets. Because gross domestic product growth in emerging markets should be double or triple of that in developed markets, we spend a lot of time mining emerging markets for growth stocks that can generate consistent earnings. At the moment, and since I have been managing the fund, I have found more of these companies domiciled in emerging markets. We believe that buying and owning these companies should, over time, provide superior returns.
2. How concerned are you about the threat of inflation in emerging markets?
In general, inflation leads to higher interest rates, which, in turn, leads to lower equity valuations. It can also cause governments to take actions that slow growth and hurt earnings. We continually examine these factors and consider them in our investment decisions. Currently, we believe that inflation is leveling off or beginning to decline in many emerging markets, and this should be a positive for many of those markets. In our view, food prices are nearing a cyclical peak, and several other commodities are trending lower. Over the intermediate term, this should benefit emerging markets, especially China, India, and Brazil.
3. Have the recent disasters in Japan altered your investment thesis for the country in any way?
I think that, structurally, the earthquake and tsunami on March 11, 2011, was a mild negative. People will leave Japan, and an already-bad demographic scenario will get worse. As a consequence, many companies will not invest in Japan, or they will invest less. Japanese companies with cash are likely to sit on the cash, fearful of another issue. Cyclically, it is a negative now but could be a mild positive as the economy rebounds.
The Japanese economy has struggled to generate growth for many years. I think that is a big part of the explanation as to why its stock market and corporate earnings haven't performed well. For the past several years, the International Stock fund has been underweight in Japanese stocks because we are not finding many companies with the growth characteristics we demand. Although Japanese stocks appear historically cheap, the economy's lack of growth, long-term structural debt, and high unemployment are significant headwinds that need to be addressed.
4. Why is health care underrepresented in the fund?
Health care is underrepresented in the fund for the same reason financials are underrepresented: It is difficult for us to find solid growth companies at good prices in both sectors. We always try to buy the best risk-adjusted growth stocks.
The International Stock fund is subject to the risks of international investing, including currency risk and political risk. The information presented was current as of June 8, 2011; Mr. Smith's views and the fund's portfolio may have changed since that time. This material should not be deemed a recommendation to buy or sell shares of any specific security.
