Survivors of the storm

Kiplinger's Personal Finance Magazine, Nov, 1998 by Fred W. Frailey

The co-managers of Twentieth Century International Discovery have what few of their peers have: positive returns for 1998.

Recent events gave lie to the notion that conservative mutual funds can really protect you from bear markets, or that diversification abroad can accomplish much the same thing. A mere seven of the 475 U.S. stock funds with the word "value" in their names made money for shareholders during the first eight months of the year, and the typical international fund plunged 21% late last summer. Even such stalwarts of cautious investing as Mutual Shares and Vanguard Windsor funds have fallen on their faces during 1998.

American Century-Twentieth Century International Discovery fund didn't escape the storm, either. It, too, lost lots of money during the July-to-September slump. But such is the acumen of its lead managers, Mark Kopinski (at right in the photo) and Henrik Strabo, that this repository of stocks of small overseas companies still ranks in the top tenth of broad-based international funds for 1998, with a total return exceeding 10% as of mid September. Moreover, it boasts the best three-year record in its category--actually, the best record of any diversified international fund from the day of its founding in early 1994.

To build returns that could withstand the late-summer tsunami is no small achievement. So it was with some curiosity that we met Copenhagen native Strabo and Chicagoan Kopinski one recent afternoon in Greenwich, Conn., their home base. (A recently named co-manager, Michael Donnelly, was out of town.)

Kiplinger's: Are you confused right now by what is going on in world markets?

Strabo: I've never been as confused as I am now. There's this thing traveling around the globe....

Like a virus?

Strabo: Well, more like a train. The train started at a place called Bangkok, and every time it reaches another country, the stocks at that platform blow up! Now there are only two platforms left. One is called Europe and the other the U.S. Does this train continue, or does it slow down or even get derailed? Nobody who saw it leave Bangkok a year ago even dreamed of the places it would visit.

It seems to be slowing just now. Meanwhile, you're running out of markets to hide in, aren't you?

Kopinski: Yes. But the thing is, tomorrow the Russians could come up with a great plan to satisfy the markets, Japan could do something like let three big banks go under to cleanse its financial system, and suddenly Santa Claus might be back. Strabo: This could be an incredible buying opportunity.

In the summer of 1997, when Pacific Rim stock markets began falling, were you heavily invested there?

Strabo: Not really. Rather than listen to what economists said--they were predicting 8% growth rates for the next 200 years--we listened to what companies told us, and we saw earnings collapsing and profit margins coming under enormous pressure. It wasn't that we made a decision beforehand to leave Asia. Rather, as individual companies came under pressure, we replaced them with ones showing better, more consistent earnings growth, and they turned out, for the most part, to be in Europe.

Kopinski: As Asia started to blow up, we said to ourselves, "if this goes further, what will be the consequences?" There was a concerted effort to search through the portfolio to see which of the stocks we owned had exposure to Asia, how much exposure and what risks were involved. We evaluated the risks rather quickly and did some reconstruction of the portfolio on the possibility that some holdings were going to be hurt. That was at a time when a lot of the commentary dismissed the dangers.

Maybe we've gotten ahead of ourselves. How do you pick stocks in the first place?

Strabo: Everybody here knows what to look for, and that is earnings growth--especially acceleration of earnings growth--anywhere in the world. That means that on a day-to-day basis we pay an awful lot of attention to earnings announcements.

Your sister funds in the U.S. use a huge database to plot earnings acceleration. Do you also rely on computer programs a lot?

Strabo: We have a database that we look at. But it's only one of many avenues that we pursue. We like to get acceleration if we can find it, but I'm perfectly happy with companies able to produce very significant earnings growth over time, whether or not that growth is accelerating.

Why aren't you more picky?

Kopinski: Because it's more difficult outside of the U.S. to get data proving acceleration. In some stock markets, companies report earnings only twice a year.

Strabo: Or sometimes with German companies it's six to 12 months later before you get final numbers.

Kopinski: Or you get the revenues on one day and the earnings that came from those revenues five months after that.

But when Henrik says the spirit of our process is earnings growth, believe it. If earnings aren't growing, don't talk about the stock to us.

At what point do you look up from these individual companies and factor in the big picture--what's happening in the world?