Q:  What is the focus of the fund?   A : Allianz Global Investors launched the International Value Fund in 2003 to seek long-term growth of capital and income by investing in common stocks of international companies with market cap of at least $1 billion. The fund is sub-advised by NFJ Investment Group LLC, an affiliate of PIMCO Advisors.   Q:  How do you define your investment philosophy?   A : The investment philosophy is rooted in the beliefs that companies with solid balance sheets and stable business models generate consistent earnings. We are looking to invest in companies that are operating outside the U.S. and benefit from the future economic growth in these markets.   Our investment philosophy also pays a lot of attention to the price we pay for the stocks that we invest in.   As a value manager, we look for companies with strong balance sheets, discounted valuations and managements that reward shareholders. From time to time, good and strong companies tend to fall out of favor for temporary reasons. We look for those companies that are trading at a discount to their long-term value.   Q:  What are the elements of your investment process?   A : Our investment process involves identifying sectors, stocks and countries to invest in. We are value investors so we pay a lot of attention to the individual stock that we are evaluating and the price that we are willing to pay. We prefer to invest in companies that are consistent dividend payers because we believe that companies with dividend discipline are likely to produce higher long term returns.   We believe that stocks with strong fundamental characteristics are rewarded over time. If a research process could identify these stocks, it should be possible to build a portfolio of stocks that would consistently outperform the market for long periods of time.   These factors include consistent earnings and earnings growth, high free cash flow yields and companies that are trading at a discount to their intrinsic value. Companies having a core customer base and management with a track record of proven financial prudence are likely to generate stable and consistent earnings.   Even the best managed companies with strong balance sheets can be out of favor at times due to temporary reasons. Our investment process looks to evaluate the nature of the problem and if we believe that the current problem is transitory and less likely to affect the long-term business model, we will dig deeper.   Essentially, we are looking at companies that are healthy but experiencing problems that can be fixed over time, especially when their business model can be defended with the help of their strong balance sheets and the amount of free cash flow that they generate.   We also invest only in companies with a dividend history. In our view, managements with dividend discipline have a culture of rewarding stockholders and are fiscally prudent.   Q:   Do you have any specific set of rules that you strictly follow in your research?   A : Yes we do. The first rule that we follow here is that every stock that we hold must pay or be expected to pay a cash dividend without any exception. We insist on this because we have found that over time companies that pay dividends outperform those companies that do not pay any dividend. If a company believes in paying dividend, they are not only giving preference to their shareholders but they are also forced to avoid marginal projects that erode returns on capital and reduce the capacity to pay dividends. It acts as a regular check to the performance of the management.   Another thing that differentiates us is that we use a price momentum indicator as a tool in our analysis. We have found that price momentum works very well in the value space as well as the growth space. But unlike growth managers who use price momentum as a primary driver of their investment decisions, we use it as a risk metric and timing indicator.   We use the price momentum metric to rank all the stocks in our universe on a scale of 1 to 10, with 1 being the highest rated and 10 being the lowest rated. What we have found is that stocks with extremely poor price momentum tend to under perform the market in the next six to nine months. We avoid buying those stocks that are in bottom quintile to avoid any value traps.   A third differentiator for us is that we use diversification. The maximum that we can buy in any one stock is 4% and typically we pick only one stock from each industry. We don’t take any big bets on any one given sector, or any given name.   Q:  When you look at international stocks, do you consider the entire universe?   A : We look at only those companies that have American Depository Receipts and are traded in the United States. They need to be traded here in the U.S for them to be even on our radar. The companies that are listed on an exchange in the U.S have to file reports with the SEC and are subject to U.S. regulatory practices. It is often easier to compare companies in this universe because of the accounting standards that are required to trade in this market.   Q:  What is your stock selection process?   A : We divide our universe on an industry basis. When we hone in on an industry for selection we look for the cheapest name in that industry that meets our requirements. When we find the cheapest name in each industry, we rank those names on four different metrics, price-to-earnings, price-to-book, dividend yield, and price momentum.   At this point we do an in-depth fundamental analysis of the company. One of our analysts will sit down and go through the company’s business model and industry dynamics to ascertain that there is nothing inherently wrong with the company and the stock.   Since we are looking for out of favor companies that have only an emotional overhang and not a financial overhang, we check and ascertain the strength in the earnings quality and the balance sheet of the company, especially with reference to strong free cash flow. We also look at some other things like pension overhangs, potential option dilutions, bond covenants and upcoming debt refinancing and/or payment schedules.   If a stock passes all these checks, we typically buy into the stock.   Q:  Would you give us some examples? A : Last year, we bought a British company that published text books and a financial newspaper. At the time of purchase, the stock was trading at low multiples relative to the market, to its peers and also to its own historical valuations. The stock looked favorable and cheap on our metrics that I described earlier. Furthermore, the company was yielding 5% at the time.   We checked with sell side analysts on Wall Street about this stock and we asked ourselves why the stock was trading so low. The general belief was that the company is in the business of selling textbooks to school children and text book budgets at state run schools were declining. In addition, their newspaper unit was suffering from a decline in advertising revenues and the prospects of turnaround in the near future were bleak. We like to see stocks where there is pessimistic sentiment because in these cases bad news is often already factored into the price of the stock and thus they have limited downside. In these situations, all we need for the stock to do well is for the news flow to get less negative.   The next logical step was to check the balance sheet. We found that the company not only had a very strong balance sheet but also good strong cash flow. They had increased dividend for the last seventeen years in a row.   When the stock met all of our requirements, we bought shares in the company and since our purchase the stock has increased approximately 40% in value and paid dividends along the way as well.   Q:  What is your next example?   A : We recently sold a Brazilian telecommunications carrier. We held the stock for most of 2009 and sold that position in December. Since emerging markets stocks rose significantly in 2009, this company’s earnings multiple got stretched and we sold the stock.   When we sold this stock it was trading at 15 times earnings and we ended up buying stock in an Australian Telecommunications company that at the time traded at ten times earnings and had a higher dividend yield than the Brazilian company we sold.   In our research, we found that the company we bought basically held a monopoly in the Australian telecom industry and has very few competitors. The stock also met all our fundamental and technical criteria and we initiated a small position.   Q:  How would you describe your sell discipline? A : Just like the strict buy discipline that we use, we have a disciplined selling process as well. We will sell our positions when stocks trade in the high teens on earnings. But if a stock has a good price momentum we may drag our feet a little.   We also sell when a stock is trading at a higher relative valuation than its peer group. In this case, we swap the position with one that’s trading cheaper like in the case of the telecommunications trade I mentioned earlier.   The next reason we would sell a position is when there is fundamental quality deterioration in the stock. We are not always going to be right in our stock selection and when we find a significant deterioration in the business conditions to the point that it affects the core business, we sell the position.   The final reason we sell is when the stock has very poor price momentum and if it falls into the tenth decile on our ranking system, we will look for another name.   Q:  What is the fund’s benchmark?   A : We follow the MSCI ACWI ex-U.S index as our benchmark.   Q:  Do you have any limit to your investment in emerging markets? A : We have the ability to go as high as 50% in the emerging markets. When one looks at the trends in world demographics and economic activity, it does not seem unreasonable to have the opportunity to go as high as 50% in the developing world. This limit really allows us to go where the deepest values are.   We were roughly 50% allocated to emerging markets in 2006-2007, and at that time we were roughly 10% in the Chinese stocks. During that period, there were significant valuation discounts in certain emerging market stocks and we took advantage. As the earnings multiples got stretched in 2008, we sold all our positions in China not because of a top down macro call but because stocks elsewhere were more attractive from a valuation standpoint.   Q:  What kinds of risks do you monitor and how do you manage them?   A : By forcing diversification, we mitigate some downside risk in the portfolio. We try to eliminate certain political risks by shying away from those countries that are not friendly to capital investment. We do not invest in countries where we see some stability issues like a coup d'état or expropriation risk.   Additionally, our strict discipline of buy and sell price also helps avoid making emotional mistakes.