Taking Advantage of the Stimulus
Glenn Fogle, manager of American Century Vista, says a lot of the U.S. monetary stimulus is going to stimulate other economies and picks commodities over health care.
Mike Breen: Greetings. This is Mike Breen coming to you from the 2009 Morningstar Investment Conference. We're here with Glenn Fogle, who is the manager of the American Century Vista portfolio (TWCVX). He's been there for more than 15 years. The fund has a fantastic long-term record. Welcome, Glenn.
Glenn Fogle: Thank you.
Breen: You had an interesting year in '08. Everyone had a tough time and you took some hits. The fund has a great long-term record. Are there any particular things with the model maybe you can explain? Or your system that you kind of learned to tweak in a tough environment like '08?
Fogle: Mike, we've been investing at American Century in this model since the 1970s, and we've been learning more about it as we go along. One thing we've learned is that it benefits from persistent trends, and it benefits from dispersion of returns. Over the last few years in the market stocks have been becoming more highly correlated. So the difference between good stocks and bad stocks has been less. Then in 2008, we discovered what happened when trends reverse. All the trends that were working for us came to a halt in the summer and everything began to collapse. And there really wasn't any place to play defense for a while.
Breen: OK. And if that was correct, sort of based on firms with improving prospects, accelerating earnings and those types of things, is there a little bit of a challenge in this environment where the baseline has become so low that things are not necessarily steadily accelerating, they're just bouncing off of a low? And then how do you get a handle on where that falls?
Fogle: No, that's absolutely true. We define growth a little differently, as you've mentioned. We're looking for an improvement in the rate of growth. We think that the market tries to be pretty efficient, but that the opportunities for excess returns come from knowing things that the market doesn't know. Or understanding things that the market misunderstands. And the best place to find that is companies that are undergoing positive change. So for a while in 2008, that was hard to find at all. There were a few pockets of resistance, things that were counter-cyclical like the education stocks and the discount retailers. But for the most part everybody was caught up in the economic contraction of the second half of 2008. That did set the bar so low that paradoxically right now every company looks like their growth rate is improving, but for many that will prove to be a false rebound, and it's just because the bar has been set so low.
So our job is to try to separate the companies with sustainable business improvement, that are still going to be seeing improving results in Q2 and Q3, from those that are still seeing business in general contract.
Breen: OK. Where are you finding a few things then now? What looks attractive and what are you maybe buying?
Fogle: This global stimulus has been massive and unprecedented in scale. But what's interesting is that money can go where it's treated best. So the money that's been created by the Federal Reserve may not wind up stimulating the U.S. economy. The U.S. economy is still driven by the consumer 70%, and consumers are constrained by their willingness to take on debt and by the ability or the interest of creditors to extend it to them. So consequently a lot of that monetary stimulus is going to stimulate other economies. So we're more interested or we have more confidence in economic prospects that are outside the U.S. and Western Europe.
One beneficiary of that is going to be the commodity group. Energy stocks, basic materials like metals, where demand is driven not by the developed world but by the developing world, like China and South America.
Breen: Any particular names? And also with that sort of global theme, I imagine there's a possibility to buy U.S.-domiciled firms that are doing the bulk of their work externally and then foreign firms that are a play on the U.S. Maybe you could give us a name or two.
Fogle: We limit our international holdings to less than 10%. So 90% of the portfolio has to be invested in U.S. listed, U.S. incorporated stocks. And that's absolutely the play. One good example would be Freeport Copper & Gold (FCX). Freeport has a large mine in Indonesia, but copper is probably 80%, 90% of their sales. And that commodity price is obviously set by China, who consumes more than a quarter of the world's copper--compared to the U.S. at about 10% or 12%.
Breen: So it's a small world now. I believe they're based in Louisiana, mine in Indonesia, biggest driver of demand is China. So it's not as simple as it used to be. We were chatting beforehand about a few names that you maybe were reducing a little bit, that some of the value managers at the conference that I cover were actually adding to, and some of the managed care names, Omnicare (OCR) and a couple of others. Maybe you could kind of talk about why you're a little less optimistic about them at the moment.
Fogle: In the second half of last year, one of the few places to find refuge was in health care. And there were businesses like the pharmacy benefit managers like Medco Health (MHS) and Omnicare and Express Scripts (ESRX) that were seeing good business trends. And United Health (UNH) was a special case where they had managed their business badly and had taken on risks that they probably wish they hadn't. And they decided that they would rather let business go rather than price it low enough to keep it.
The problem with the health-care sector in general right now is twofold. Number one in the short term, I think investors are expressing a preference for companies that are benefiting from the stimulus. And health care is more of a staple item.
And secondly for the health-care sector, the big risk looming is from Washington. Where they want to re-regulate the sector and essentially they want to transfer all the profits to the government and ultimately let the government decide how those dollars are spent. The risk in my mind is what the future earnings are going to be.
So clearly they're cheap, I don't dispute that. But the momentum in our opinion is weaker than it is elsewhere, and the risks about what the business is going to be like in 2010, 2011 are rising.
Breen: OK. Well, fantastic. I thank you for your time.
Fogle: Thanks very much, Mike.
Michael Breen does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.