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Value hunter looks to Europe

Templeton fund manager finds plenty to like in continent's distressed markets


The recent Ben Bernanke-inspired selloff in everything from bonds to commodities suggests that central banks are the single most important force driving markets today.

But at least one international fund manager says it can make smart decisions without fretting too much about the U.S. Federal Reserve - or, for that matter, the People's Bank of China.

"The Fed has not done everything it has [done] only to suddenly go and squash the economy," says Lisa Myers, executive vice-president of Templeton Global Equity Group and lead manager of Templeton Growth Fund Ltd. and several other products.

The markets reacted strongly to worries over how quickly the Fed will taper its monthly stimulus injection of $85-billion (U.S) after comments from Mr. Bernanke, the Fed chairman, last week. But a wiser approach is to examine what is driving the Fed and apply those factors to one's stock-picking models, Ms. Myers said in an interview in Toronto.

For her, that means looking at how rising inflation and higher interest rates will affect the earnings prospects of individual companies.

Right now, she's excited about the potential of European stocks. Five of the fund's top 10 holdings are European companies, including Paris-based pharmaceutical Sanofi-Aventis, Zurich's Credit Suisse Group AG and London's HSBC Holdings PLC.

Based in the Bahamas, Ms. Myers is part of a team of value investors looking for opportunities around the globe that can produce above average returns. Their philosophy is to take a long-term view and search for stocks that can blossom over several years, rather than trying to catch the hot trend of the next few months.

Ms. Myers says the United States was the first country to come out of the financial crisis; its stocks have benefited from that leadership position. In contrast, expectations of a recovery in Europe are not yet priced into the continent's stocks, she said. (Cisco Systems Inc. and Microsoft Corp. are the two U.S. listings among her top 10 holdings).

Ms. Myers insists that it is a mistake to build a portfolio by allocating fixed percentages to specific asset classes, such as the commonly recommended 60/40 split between stocks and bonds.

As the past few weeks in the bond markets have made clear, "safety should be defined by valuation not by an asset class," she says. "In fact, valuation is the determinant of conservative investing."

The top holding of the Templeton Growth Fund is Kingfisher PLC, Europe's largest home-improvement retailer. Ms. Myers estimates that it trades at a 40 per cent discount to its U.S. counterpart, Home Depot Inc. Shares of the London-based company have surged in the past few weeks, partly on speculation that government assistance for first-time home buyers in Britain will give a boost to do-it-yourself spending.

The fund bought into Home Depot in the depths of the U.S. housing crisis, banking on a corporate restructuring and new investments in operational efficiencies to boost profits. The strategy paid off, assisted by recent signs of a U.S. housing recovery. Ms. Myers has been taking profit from the investment at the same time as she has been buying Kingfisher.

She is also bullish on a number of European financial stocks, pointing out that France's BNP Paribas SA, Italy's UniCredit SpA and numerous other players are still trading below their book values at a time when many U.S. bank stocks have begun to trade slightly above book values.

Among consumer discretionary stocks, Ms. Myers has been trimming holdings of pharmaceutical stocks after recent gains and moving into more biotech stocks to take advantage of a rise in acquisitions by pharma companies looking for new revenue streams. She has also been selling shares of media companies in favour of Japanese automotive stocks. Toyota Motor Corp. is one of the fund's top holdings.

The Templeton Growth Fund manages $1.5-billion (Canadian) for Canadian investors and has a one-year return of 27 per cent, compared with a group average of 20 per cent.

When stretched out over 10 years, however, the returns are a more modest 4 per cent, in line with the group average. Those figures are net returns after deducting for the rather hefty 2.52 per cent management fee.

© 2007 The Globe and Mail. All rights reserved.

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