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Managers favour certain foreign stocks

INVESTMENT REPORTER

Certain international stocks such as Total SA and Vodafone Group PLC showed up in the vast majority of U.S.-based international equity funds included in a Merrill Lynch & Co. Inc. survey, but none of the stocks that fell into that category were Canadian.

"We're struck by the degree to which certain stocks appear time and time again in portfolios," said Sarah Franks, strategy analyst at Merrill Lynch. "While this will not reflect how funds are weighted in these names, it does show stocks that are most likely to appear in international funds."

Total, a French oil company, and Vodafone, a British-based mobile telecommunications firm, were held by 80 per cent of the international stock funds included in the Merrill Lynch survey, which looked at the funds' holdings as of March 31, the most recent publicly available data. Merrill Lynch examined the holdings of 54 international stock funds, which collectively held $270-billion (U.S.) in assets. That represents 60 per cent of the assets held by U.S.-based international equity funds. (Sector and region-specific funds, along with index and small-capitalization funds, were excluded from the survey.)

Food processor Nestlé SA, electronics giant Samsung Electronics Co. Ltd., Canon Inc., famous for its cameras and office equipment, and pharmaceutical firm GlaxoSmithKline PLC were also favourites of the international equity fund managers. Each stock appeared in about three-quarters of the funds.

None of the 40 most widely held stocks listed were Canadian.

The survey also looked at the relative country weightings and found that Hong Kong and the Netherlands formed the biggest country overweights, while Britain and Australia were the largest underweights. Hong Kong, for example, had a 3.2-per-cent weighting in the funds, but it accounts for just 1.7 per cent of the Morgan Stanley Capital International Europe, Australasia and Far East (EAFE) index. The gap was even wider for the Netherlands, which accounted for a 6.8-per-cent weighting in the funds, well above its 4.8-per-cent weight in the EAFE.

Japan was roughly market weight at 24.2 per cent. Britain was the next most heavily weighted country at 22.5 per cent, but that is below its EAFE weighting of 25 per cent.

South Korea formed the largest weighting outside of the EAFE area, followed by Canada and Mexico.

When it came to sector holdings, the survey found the largest overweights in the EAFE area were in consumer discretionary and technology issues and the most substantial EAFE underweights were financials, followed by utilities.

© 2007 The Globe and Mail. All rights reserved.

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