When it comes to putting your money where your mouth is, Sarah Ketterer walks the globalization talk. The chief executive of Causeway Capital Management and comanager of its $5 billion International Value Fund keeps about 80 percent of her personal stock portfolio in foreign shares. It's not so much that she thinks foreign markets are the only place to put her money, "it's just that's where stocks have been most undervalued," she says of her value-investing strategy, an approach that has yielded an average annual return of 24.5 percent over the past five years.
Should average investors put such a large portion of their money into foreign shares, too?
To me, the question for me isn't how much to invest in foreign versus domestic shares; it's how much do you want to invest in developed markets versus emerging markets? Frankly, in the near term, I don't think there's any more reason to own foreign shares in the developed world [like Europe and Japan] than there is to own U.S. shares, because the valuations are similar. But it's a different story in the developing world. These markets are still growth markets, and when the global economy is in late cycle—like we think it is right now—you get a premium for growth. I have about 10 percent in emerging markets, and that will probably rise given the way they're performing.
Where do you see the greatest opportunities in foreign markets today?
In all the most unpopular areas, starting with financials, which have been trampled in the last two months. Take Japan, which used to be the least likely place to find undervaluation in the financial sector. A good example is Mitsubishi UFJ, Japan's largest bank, which has a price-to-earnings ratio in the high single digits. Management is reasonably good and improving; it's just that investors have become despondent with the domestic economy and the prospect for rising interest rates. But we see that as a cyclical setback, not a permanent one, so we're buying in now at a low valuation.
You're also buying in at a time when Japan's currency is hitting new highs against the dollar. Does that play into your strategy, too?
Every one of the target prices for the stocks we follow closely is dependent on currency changes. So big currency swings can change our holdings. Take Yamaha Motors, which we think is a great company; they make motorcycles, ATVs, and outboard motors. As the yen recently strengthened, we saw investors selling the stock on the expectation that it would impact overseas sales, which gave us an opportunity to add to our position.
How will foreign stocks fare if the U.S. economy goes into recession?
The ramifications will be felt everywhere but most acutely in places like China, where the economy is so dependent on trade with the U.S. I don't subscribe to the "decoupling theory," which argues that you can go ahead and pay those crazy valuations in China because their domestic economy is so strong that they'll be unaffected by a pullback in the U.S. I just don't think that's going to be the case. I think we'll see demand decline, and a number of emerging markets will end up reflecting that in terms of lower prices.
Given the fact that those markets are hitting all-time highs, is this really such a good time to buy?
Well, personally, I did. But I recommend the discipline of dollar-cost averaging; having fixed [percentage] allocations that are revisited and rebalanced. If you expect a global slowdown, maybe you want to stretch out your allocations. Like instead of putting in money once a month, you put it in once every quarter. But never make a decision based on timing. If you had shied away from emerging markets over the past year—when people thought they were overvalued—you'd have missed out.
Speaking of which, your fund returned 21 percent over the past year. But that's 3 percentage points less than your benchmark stock index, the Morgan Stanley EAFE. Why should people invest with you if the index is doing better?
This really depends on your time frame. If you plan to invest your money through a full market cycle, then we'll keep pace with the benchmark as it rises, or [we may] even fall a little short. But when the markets are mediocre or falling, then a deep value strategy like ours actually outperforms the index by quite a lot. We just haven't seen one of those down periods in a long time.