Brent Lynn's approach to investing is simple: Do fundamental research, then use the information to invest only in companies in which you have a high conviction in their long-term success. That philosophy has helped his Janus Overseas fund log an average annual return of nearly 34 percent over the past five years. Focusing on growth companies in places like China, India, and Brazil, Lynn looks not only for those that benefit from surging exports but also for those that profit from growing domestic demand for everything from houses to electricity.
What's the biggest reason for owning foreign stocks?
It's important for any investor to take a long-term approach, and I believe that foreign stocks offer investors opportunities for diversification, for participating in countries with economic growth significantly faster than [that of] the United States, and for participating in industries that aren't necessarily growth areas in the United States.
A large percentage of our fund over the past three to four years has been invested in emerging markets, and I don't believe this is a coincidence. I believe that the fall of communism and the reintegration of billions of people into the global economy is perhaps the most important economic event of my lifetime.
When countries like China and India are creating wealth at an incredibly rapid pace, where new industries are forming, where there is transformation of economies, it's natural that some of the strongest, best-positioned companies in these countries can have very exciting growth prospects.
Emerging markets have certainly been a great bet. But their indexes are at all-time highs right now. Is this a time to be cautious?
You need to sit down with your financial adviser and clearly understand [your] risk tolerances and [your] time horizon. For an investor with either lower risk tolerances or a shorter time horizon, I don't believe that emerging-market investing, or our overseas fund, is appropriate.
I believe there are some very powerful secular trends favoring countries like China, India, and Brazil. But on a shorter-term basis, these markets can have significant and sharp corrections. And valuations in a number of these markets are certainly no longer as inexpensive as they were a few years ago. So people need to keep that in mind.
Where do you see the greatest opportunities?
In Brazil, for example, we've had investments in export-oriented companies in the materials sectors, like Companhia Vale do Rio Doce. They've been competitively advantaged because they're among the world's low-cost producers. If you're the low-cost producer, you'll make money in virtually every part of the commodities cycle. In addition to being low-cost producers, they also have had some of the most exciting capacity growth, high return on investment, and expansion.
At the same time, we're also seeing a housing boom in Brazil, so we've had investments in housing developer Cyrela, the leading home builder in Brazil, which we believe is also competitively advantaged as a result of its scale, track record, management team, and also its land bank.
In China, where there's also an explosion in demand for residential housing, we've had an investment in China Overseas Land & Investment Ltd., which we believe is competitively advantaged because of its access to capital, land bank, scale, and track record.
In India, where I mentioned infrastructure demand, we've had a long-term investment in Reliance Industries, a conglomerate that is India's leading petrochemical and refining company. They've also made significant oil and gas discoveries. Reliance is also making a large push to bring organized supermarkets and convenience stores to India. They're developing the entire logistics network—transportation, cold storage, and relationships with farmers to buy produce direct and keep it in their distribution network all the way to their stores.
Do you favor certain industries right now?
In terms of industry bias, our biggest increase in industry weighting over the past year has come in the technology area. This isn't based on the macro outlook. In fact, it's not even clear to me that the long-term outlook in tech is that great. I think it's, maybe, OK.