Being a value manager in the equity space this year hasn’t been an easy job. When investors are focused on capital preservation and risk is said to be “off” the table, the value proposition can certainly require some conviction. Templeton Equity Group CIO Norm Boersma knows that when certain sectors are out of favor, that’s often when the best opportunities surface. To position for a time when risk is back “on,” he is embracing the low market valuations present in Europe and elsewhere.
Boersma’s key thoughts, in brief:
- “We think going forward, we should start to see the resolution in Europe coming slowly. When that happens, people should be more focused on valuation.”
- “Many (European) companies are currently valued at approximately a 20-30% discount to what you can buy in other markets, and that really doesn’t make sense to us.”
- Diversification, albeit not foolproof, can help reduce risks, no matter where or when they occur.
Equity investors seem to be split into two camps today: those seeking “quality” and those seeking “value.” The eurozone crisis has played a big part in driving investors to the former over the latter this year. Here’s how Boersma sees it.
“It’s a situation where we as value managers have held our own, but it has been a very difficult market environment in general. People have essentially not wanted to be in equities and when they do, it’s really about preserving capital. We think going forward we should start to see the resolution in Europe coming slowly. When that happens, people should be more focused on valuation. There are things that they’ve (European policymakers) already done that are sort of small steps forward. They are now talking about a big policy initiative—basically the central bank buying bonds.”
Valuations and dividend yields in European stocks have reflected the eurozone’s debt struggles this year. Boersma notes price/earnings multiples have fallen into the single-digits, and dividend yields have risen to levels not seen in decades.
“That really reflects that there is an awful lot of uncertainty. When you start looking at the types of companies we have been buying, it’s almost two baskets. One basket is multinational companies based in Europe. If you take a look at some of the (European) stocks that compete with U.S. and Asian companies more or less along the same business mixes, these are not just European companies, they are global companies. They have recently been valued at approximately a 20-30% discount to what you can buy in other markets, and that really doesn’t make sense to us. The other basket is U.S. and Asian companies that are also present in Europe in terms of their operations. We’ve also been nibbling away at the financials. There you see essentially a situation where people are so focused on the risk level that they’ve driven these stocks down to valuations that have rarely been seen in 100 years. So, that’s a pretty dire forecast that’s been built into those valuations. We see companies where the balance sheets have been refinanced, where we don’t think the risk being built into those valuations is actually warranted.”
One other area where Boersma is finding opportunity today is the energy sector. Ups and downs in gasoline prices often get the most media attention, but he notes that U.S. natural gas has been languishing for many years and could present a potential opportunity for long-term investors.
“We think longer-term (to use the popular phrase) the best solution for low commodity prices is typically low commodity prices. The companies don’t reinvest in replacement gas that they are pumping out of the ground (when prices are low) and what you see then is gas prices slowly going back to what we think of as more normalized levels. We are already starting to see that. We find the direct producers cheap, as well as the oil services companies that are essentially helping those companies drill wells and pull the gas out of the ground. That’s a really interesting area to us.”
We all of course hope for the best when it comes to Europe’s debt crisis, the looming U.S. “fiscal cliff,” or any other global market roadblock. There will likely always be challenges somewhere, but what can an investor do to help navigate these minefields until they are cleared? While it does not guarantee profit or protect against loss, a simple, albeit not foolproof strategy is diversification.
“Do we have investments in areas like Europe where people are worried about the worst-case scenario? Sure, we do. As I said, we have multinational companies that, if Europe really goes into a deep depression, have earnings and revenues coming from other places of the world. We also have holdings in the U.S., in the emerging markets and around the rest of the world. So, we are pretty well-diversified and that’s really our way of helping reduce those risks.”
Boersma is also the lead portfolio manager for the flagship Templeton Growth Fund—a fund launched in the same year Elvis Presley paid a studio in Nashville, Tennessee to record his first two songs. The name is a bit of a misnomer; a value-driven approach has been a hallmark of the fund since its inception in 1954. As markets expanded through the decades, diversification became a key component of the strategy too.
“John Templeton put in place a process that we continue to use today. It’s been a value fund since the beginning. We certainly are invested in many more markets since John Templeton started it. Over time it’s evolved into having holdings in Europe and all over the world; in Asia, Latin America, Eastern Europe, Africa.1 The basic approach or philosophy—finding the cheapest quality stocks that we can find globally, being diversified and really focusing on individual companies—remains the same today. European holdings have been one of the challenges over the last year, but now are turning into an opportunity. We are starting to see the low valuations that I talked about become recognized by the markets. Our forte is buying individual stocks that look cheap across multiple sectors.”
That brings to mind one of Sir John Templeton’s 16 Rules of Investment Success: “When buying stocks, search for bargains among quality stocks.”
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What are the Risks?
All investments involve risks, including the possible loss of principal. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments; investments in emerging markets involve heightened risks related to the same factors. To the extent the Templeton Growth Fund focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a fund that invests in a wider variety of countries, regions, industries, sectors or investments. Current political uncertainty surrounding the European Union (EU) and its membership may increase market volatility. The financial instability of some countries in the EU, including Greece, Italy and Spain, together with the risk of that impacting other more stable countries may increase the economic risk of investing in companies in Europe. These and other risks are discussed in the Templeton Growth Fund’s prospectus.
1. Templeton Growth Fund geographic breakdown by percentage, as of 7/31/12: Europe: 47.11%; North America: 38.48; Asia 12.02%; Latin America/Caribbean 1.24%; Other 1.15%. Holdings subject to change.