Global manager treads carefully in Japan

Manulife's Chris Arbuthnot remains keen on emerging markets.

Sonita Horvitch 23 March, 2011 | 6:00PM
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Christopher Arbuthnot, senior managing director at Manulife Asset Management (U.S.) LLC, has been picking his spots carefully in Japan in the wake of that country's crisis and the accompanying pullback in the Japanese stock market.

"I have been buying select Japanese exporters that are unlikely to be impaired by the unfortunate events there," says Arbuthnot, who is a global manager. Valuations on some Japanese industrial/exporting companies currently "provide a significant margin of safety."

Japanese exporters have, for some time, been less competitive in global markets because of the strength of the Japanese yen, Arbuthnot says. "The strong currency has also squeezed export margins." In response, these companies have been forced to cut costs.

"If the yen weakens, which I think it might, this will make Japanese exports more competitive and improve profit margins on those exports," Arbuthnot says. He adds that he can hedge the currency, so that a weaker yen will not affect the value of his holdings in Japan.

Despite these ongoing stock additions, Japan will remain an underweight position in the global portfolio relative to the benchmark MSCI All Country World Index, says Arbuthnot.

Of other developed countries, Arbuthnot notes that he is finding few opportunities in the United States. At a 26% weighting in the global portfolio, it's the lowest that it has been for some time.

MSCI Emerging
Markets Index (C$)
MSCI All Country
World Index (C$)
Year to date -5.4% 2.6%
1 year 11.8% 12.6%
3 year 0.6% 0.2%
5 year 6.6% 0.8%
For periods ended Feb. 28
Source: Morningstar

But he is "finding good value opportunities" in the energy sector in Canada, which represents a hefty 19% of the portfolio -- a significant country overweight relative to the benchmark.

Arbuthnot notes that since last November, investors have been moving money out of emerging markets into developed markets, with the resultant underperformance of the former.

There were concerns, he says, about inflationary pressures in major emerging economies, coupled with investor sentiment that these emerging stock markets had become "too hot."

He remains a believer in emerging markets, which currently represent 39% of his global portfolio. His ongoing emphasis is on leading companies in Brazil, which represents 18% of the portfolio, and on key players in India (15%). He is less enthusiastic about opportunities in China, which represents only 3% of the portfolio.

Based in Boston, Arbuthnot is a senior portfolio manager and team member for the global opportunities strategy at the U.S. division of Manulife Asset Management. He is responsible for mandates totalling $1.8 billion, including Manulife Global Opportunities Balanced and Manulife Global Opportunities Class.

His style is two-pronged: value in developed markets, and more of a GARP (growth at a reasonable price) approach when it comes to emerging markets. Manulife Global Opportunities Class, which has some 50 names, has a 24% weighting in energy, "a big overweight position."

Christopher Arbuthnot

Arbuthnot considers that analysts have been "overly conservative in their energy-price assumptions in valuing these stocks, and they are likely to raise them given oil's recent climb."

A Canadian energy producer that Arbuthnot recently added is Ivanhoe Energy Inc. IE, "which has significantly undervalued assets." Ivanhoe's core operations are in Canada, Ecuador, China and Mongolia.

Sunwing Energy Inc. is Ivanhoe's wholly owned oil and gas subsidiary in Asia. In addition to its oil production, Sunwing is the operator of a significant natural-gas exploration block in Zitong, Sichuan Province. "The Chinese economy is thirsty for natural gas."

Arbuthnot's largest energy holding and the largest holding in the fund continues to be Brazil's OGX Petroleo E Gas Participaceos S.A., which has offshore oil and gas assets. Controlled by Eike Batista, a wealthy Brazilian entrepreneur, the company plans to start production in the third quarter of 2011. "This will change the profile of OGX," Arbuthnot says.

A recent addition to the portfolio is Brazil's LLX Logistica S.A., also controlled by Batista. The company, in the fund's top 10 holdings, provides integrated infrastructure and logistics services primarily in the development of Brazilian ports. "One of its large port projects will be completed in 2012," says Arbuthnot. "It is a world-class infrastructure asset and will facilitate Brazil's trade with the rest of the world."

Turning to India, Arbuthnot notes that the Indian stock market has taken a big hit since November, "based on concerns about the rise of inflation and the need for the Indian government to cool the economy." But, he adds, "the favourable long-term outlook for India's economic growth remains intact."

An Indian financial-services company that Arbuthnot considers to be "undervalued" is Reliance Capital Ltd., which is part of the Reliance ADAG holding group controlled by the wealthy Indian entrepreneur Anil Ambani.

Reliance Capital's stock took a hit earlier this year, Arbuthnot says, which was when he added to his holding. "This stock was caught up in a major telecom scandal in the country that included sister company Reliance Communications, a leading mobile-phone company."

Arbuthnot says that Reliance Capital has a separate board of directors and has attracted a major foreign investor. Reliance Capital provides insurance, asset management, brokerage and consumer finance.

Japan's Nippon Life Insurance Co. is buying a 26% stake in Reliance Life Insurance, a unit of Reliance Capital, for US$680 million. "Reliance Capital's stock has moved up on this news, but still offers good value, given the valuation placed on the insurance arm of the company by this deal," says Arbuthnot.

A consumer staples-company that he considers also "offers good value and has good growth potential" is Colgate-Palmolive (India Ltd.), which is a subsidiary of a major U.S. multinational. The company's brand is highly prized in India, says Arbuthnot, and "it will benefit from the increasing per capita income."

Turning to China, Arbuthnot notes that the Chinese car-manufacturing industry has become increasingly competitive and margins are under pressure. In light of this, he has been reducing his holding in BYD Co. Ltd., a company in which Warren Buffett's Berkshire Hathaway Inc. has a 10% stake. "BYD is facing a margin contraction and recently reported poorer than anticipated fourth-quarter earnings."

By contrast, Arbuthnot is maintaining his position in China's Geely Automobile Holdings Ltd., which he considers to be better placed than BYD to meet the tougher domestic competition.

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Sonita Horvitch

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