Hans van den Berg sees plenty of opportunities to turn around the performance of TD International Growth.
"Last year we had 20 new ideas in the portfolio, among about 70 holdings," says van den Berg, "while this year so far, in the first quarter, we had nine new names. So we do indeed see plenty of exciting opportunities at this time of volatility, and in all sectors."
Van den Berg co-founded Echo Point Investment Management LLC, based in the Philadelphia area, on Oct. 1, 2010. He has managed the TD mandate, though with three different firms, since its inception in September 2006.
A graduate of Nijenrode University in the Netherlands, van den Berg received a BBA in 1978, and then an MBA in 1980 from Temple University in Philadelphia. From 1983 to 1995, he was managing director and chief investment officer for Pierson Capital Management in Amsterdam.
In 1995, van den Berg moved to 1838 Investment Advisors in Philadelphia, where he was head of international equities. He joined Morgan Stanley in 2005 and continued to manage the TD fund for a brief time in 2010 at Invesco, which acquired the Morgan Stanley business unit for which he worked.
In October of last year, TD Asset Management Inc. handed the fund-management contract to Echo Point. Van den Berg is the head of Echo Point's international growth-equity team, which includes four portfolio managers and an analyst, and is responsible for US$1.7 billion in assets under management.
The TD fund doesn't yet have a five-year track record, but over the three years ended March 31 its compound annual loss of 8.3% places it in the fourth quartile in the International Equity category. Though returns have turned positive, it remains in the bottom quartile for the most recent 12 months, returning 3.1%, compared with the median return of 5.3%.
Like other international-equity managers, van den Berg faces multiple challenges: unrest in the Middle East, sovereign debt woes in Europe, and the aftermath of the Japanese earthquake, tsunami and nuclear disaster. "It's like an old proverb," he says. "You have to sit still while somebody is shaving you, which means don't panic, stick to your process, even put in some buy orders with limits, so you can pick up some of these stocks on down days."
New ideas for the portfolio, mostly large-cap companies, are based on a bottom-up, stock-picking approach. Management is considered the key factor in what makes or breaks a company, so van den Berg looks for track records of consistently increasing revenues and earnings faster than the industry norm.
Other criteria include a strategic plan by management to outpace their peers over the next five years, and creating competitive advantages such as low-cost production, superior distribution and technological innovation. As well, strong balance sheets are considered essential so the businesses can finance their own growth.
Van den Berg manages under both sector and geographic constraints. Sector weights are kept at plus or minus five percentage points of the weightings of the fund's market benchmark, the MSCI EAFE Index.
Geographically, weightings for most countries must be kept within plus or minus 10 percentage points of the benchmark. The exception is emerging markets, where there is a maximum exposure of 15%. Currently, the fund has about 57% exposure in Europe, including the UK.
To whittle down the more than 30,000 stocks in the international universe, there is a requirement for a minimum market capitalization of US$1 billion. Secondly, there is a liquidity screen. To be considered, companies must on average have more than US$50 million in daily trading volume.
These two parameters narrow down the universe to roughly 1,500 names. Other quantitative screens, designed to target stocks with the strongest earnings momentum yet with reasonable valuations, pare the list down to about 300 names.
Additional fundamental analysis is conducted to determine the fund's holdings of roughly 70 names. Van den Berg looks at revenue and earnings, balance sheets and management strategies for continuing growth, along with other criteria.
Among van den Berg's picks is the Australian-based mining giant BHP Billiton Ltd. BHP, a top holding in the fund for more than six years. "It's very large in iron, ore, coal and copper," he says, "and all of these commodities are very much in demand, primarily due to the fast growth in emerging economies." As well, he adds, BHP Billiton is a low-cost producer.
Another top holding is Israel-based Teva Pharmaceutical Industries Ltd. TEVA, the largest manufacturer of generic drugs. Teva "benefits tremendously from the fact that many drugs at pharmaceutical companies are going off patent," says van den Berg. "They have the smartest legal teams to be able to challenge existing patents, have very solid production facilities, and are amongst the first to come out with the new generics."
