Q: What is the history of the fund?
Originally called the Oppenheimer International Value Fund, the Oppenheimer International Equity Fund was launched on July 2, 1990, and I became the portfolio manager of this fund in 2013. Our benchmark is the MSCI ACWI ex USA Index.
The previous manager was quantitative, buying cheap stocks off value screens. I had worked at the firm in the past, in the early 1990s, as part of the global equity team. When I returned to take on this fund, the portfolio managers of the Oppenheimer Global Value Fund and Oppenheimer Global Fund, along with the global team, had already restructured this to be a theme fund, with 15% cash, so it was an easy transition for me.
It is now managed more in line with the other international and global funds here, and has climbed from the bottom quartile of the category to the top third of core/blend funds based on its past 10 years, not just the last five. That’s a real turnaround.
Q: How do you define your investment philosophy?
We call our style “thematic growth.” We look for companies with structural tailwinds.
We are benchmark agnostic. Rather than constructing a portfolio around a benchmark, we structure it around themes with long-term potential or structural tailwinds that will help companies outperform over time. That’s very different from growth funds that are managed around earnings momentum.
The themes have evolved over time, but one consistent theme has been to target companies that are restructuring. While the funds at OppenheimerFunds are managed individually, ours is a collegial culture, where we share ideas. Everyone in the global equity team is based in our New York headquarters. It’s our feeling that people become siloed when they operate from far-flung offices. We prefer to have our team in the same place.
I have a predilection for macro analysis, which helps us position the fund, but our core beliefs are to be index agnostic, that active management still wins in international equity investing, and that thematic growth is a good way to structure portfolios.
Q: What is your investment process?
While the mantra centers on big themes, what is interesting are the subthemes. Take, for instance, the electrification of the car and the electronic components that go into cars. We have holdings that have subthemes with potentially long, attractive futures, as opposed to, say, the car market or OEMs, original equipment manufacturers, in the auto industry. Within mass affluence, we also have subthemes, one being air travel. More people in emerging markets want to travel, so we own shares in Airbus Group.
These themes enable us to screen out vast numbers of the two thousand companies in the index, such as those industries that are highly regulated, or overly commoditized, or exhibit very poor financial return. The Oppenheimer managers have many face-to-face meetings with management teams, and meet with sell-side sector-specific analysts. We also screen out companies in geographic locations where we just do not want to invest.
That generates a manageable universe, from which we create a watch list of about 150 stocks in addition to the 75 or so in the portfolio. Once we identify a subtheme as attractive, the stocks that fall into it are all worth looking at, unless the market caps are tiny or some management problem exists.
Q: Can you illustrate your research process with some examples?
Adidas AG, based in Germany, is a manufacturer of shoes, clothing, and accessories that fits into the mass affluence, emerging market, global consumer theme, within an added subtheme of people indulging in healthier behavior. When I came to OppenheimerFunds, Adidas was a controversial stock—Nike and Under Armour were market darlings while Adidas languished.
I am a bit contrarian, and like to look at things that are out of favor and analyze whether they’re good businesses. I analyzed Adidas and discovered management was changing the organizational structure from myriad regional heads to one centralized management, which contributed to reducing overhead and streamlined decision-making and the marketing new products. When they announced a share buyback in 2014, we bought the stock.
It fit our thematic on long-term structural tailwinds. It had a restructuring angle to it, was a good company that was out of favor at the time, and it has proved a great investment for us.
Q: Do you establish a price target or a milestone event for companies?
In the case of Adidas, the milestone event was the management reorganization and the share buyback, but I never establish price targets. If I want to make the investment, I do. The same holds for exiting a stock.
I look at all the usual valuation metrics—price to sales, price to cash flow, cash flow yield, EV to EBITDA, price-to-forward earnings—and I look at those valuations relative to competitors, the market, and the company’s history.
We do, however, set price targets on base case, bull case, and bear case scenarios, and my analysts and I assemble a scenario analysis for each investment and look for a skew that favors the upside, with limited downside.
When a stock passes our original price target, because the earnings and fundamentals have gotten better than originally anticipated, I revisit all the ratios and question what our upside is now and whether we can find something more interesting on our watch list.
I don’t think being dogmatic about specific price points for entry and exit is a good idea. Too much depends on market conditions. We are in a game of relative value, relative attraction, and relative growth. If growth becomes a scarce commodity, people will pay higher multiples for companies that are growing.
Q: What role does macro occupy in your strategy?
We are currently in a nice, synchronized expansion, with our industrial and capital goods stocks doing well, so we don’t need to chase price-to-earnings multiples.
In this macro environment, where the Chinese and European economies are expanding, and the US economy and Japanese corporate profits are doing well, what we have done over the last 12 months or so is to prioritize more cyclical stocks with operating leverage and financials over defensive utilities, telecommunications, and consumer non-durables which have fallen on our watch list. Macro analysis does affect both watch list prioritization and portfolio construction.
Q: Would you provide an example from another industry and location?
For us, a big holding in Japan has been multinational conglomerate Sony Corporation. What impressed me was its management team, which got rid of the former CEO after investors grew tired of him failing to restructure the organization. They extricated themselves from failed businesses like PCs, and reduced their exposure to cell phones, leaving them with their strongest items, like CMOS sensors, a vital component of all cell phone cameras.
For the first time in the company’s history, the new CEO and CFO assigned each division a cost of capital, and management was remunerated for delivering returns above the cost of capital; plus, they cut staff heavily, particularly in some of the nonperforming businesses.
Q: What process do you use to construct your portfolio?
There are generally 70 to 80 names in the portfolio. The largest position is 3%, and the top 15 above 2%, but the bulk of the portfolio positions each comprise around 1% to 1.5%, followed by starter positions at maybe 50 basis points.
For us, business falls into four categories: two are defensive (quality companies at a good price, and companies with high, free cash flow yield, high-dividend yields, consumer non-durables, and low beta stocks—what we call stabilizers); plus restructuring and turnaround situations; and cyclical companies with operating leverage.
We look at our aggregate exposure to each of these four categories, two being the more cyclical ones that benefit when the global economy grows, and the other two being quality at a good price and defensive stabilizers, which outperform in deflationary environments and when growth is decelerating. This keeps us from crowding into an area that is highly correlated.
We also have some extreme geographic allocations, such as being overweight France and Japan and underweight the UK, but it’s not like we decide we want to overweight this or that macro region or geography. We view the world as a global marketplace for stocks, and divide it into three categories: developed Asia, Europe, and emerging markets. When I look at macro statistics, I look at the US and China, and that’s what determines corporate profits in Europe and Japan and the rest of the world.
Again, we construct the portfolio around themes, not around country overweight/underweight.
Q: How do you view and manage risk?
A primary risk is having a portfolio that we think is diversified, yet the holdings are highly correlated. To get the real benefits of diversification, we must have uncorrelated securities.
We favor defensive stocks in a slowing growth environment, while in an upturn or reflationary environment, like in 2013 and again after the US elections, we favor more cyclical companies with greater operating leverage. But, for us, it boils down to understanding the correlations in our portfolio and managing that risk. We have a good risk management team, with whom we work.
Other risks are volatility versus an index, capital loss, and underperforming an index or peers. A solid long-term track record is achieved by having a lot less downside in a bear market.
I don’t believe in being dogmatic about what we do, as that runs the risk of sustained underperformance. I believe in flexibility, and taking an eclectic approach to money management. I believe in cutting our losses and letting our winners run—unless we have some really good ideas in the watch list that make it attractive to trim some of the past winners.
I like to trade around positions. For instance, there is not much turnover in our top 20 holdings. They are in there for a long time, but I will trade around them. If they get expensive, or the risk is rising, or if I make an investment and it’s not working, I will trim the position. That’s my approach to risk management for long term performance.
