He sees some positives in Europe, such as unit labor costs coming down in Spain, but says that improvements in Europe will take some time as structural changes, such as reforming labor laws, are needed.
Japan is on his watch list, particularly to see if Prime Minister Shinzo Abe can proceed with his reforms. Structural changes are needed there, Moffett says, and not just fiscal and monetary policy changes. Changes in importation laws, changes in labor laws to allow more women in the workforce and other changes in the business environment are needed to fix the country’s economic problems, Moffett says.
Until there are changes, the fund will remain underweight Japan, he says. They do own a few names, such as Japan Tobacco, Honda Motor Co and Toyota Motor Co., along with some industrial firms. They haven’t added any Japanese banks and don’t plan on it. “We still see them as the same old rotten Japanese banks,” he says.
The Scout International Fund has about 16 percent in emerging markets. One well-known name in emerging markets, Brazil, is not the darling it once was. “We’ve cut back on Brazil. The politics have changed there. They’re also a resource-based economy. We question whether or not China will buy every barrel, ton and bushel of commodities,” he says, noting current Brazilian President Dilma Rousseff is handling policies differently than previous President Lula da Silva.
As a result, they’ve sold holding in AmBev, “one of our old favorites,” he says, but are holding on to regional jet maker Embraer.
Moffett says they’re taking the money that was invested in Brazil and redeploying it in Colombia and Mexico, instead. Colombia is particularly interesting as its past struggles with the armed guerrilla group FARC are behind them, he says. “Colombia has lots of known oil on land instead of sinking hundreds of billions dollars in holes in the Atlantic. When people question me about Colombia, I ask them when was the last time you’ve heard of the FARC?” he asks. Their two Colombian holdings are energy firm Ecopetrol and bank Bancolombia.
Moffett describes the fund’s investing philosophy as both top down and bottom up. They look at which countries and sectors they want to be in and then which ones they want to avoid. From there analysts come up with ideas, such as investing more in Colombia.
The Scout International Fund is will celebrate its 20th anniversary in September and Moffett has been there since its inception. The fund has grown up over the years from investing in Japanese major exporting companies and some Latin American funds to having a much broader global reach.
Back when they first started, Moffett said it was extremely difficult to get investors interested in international securities. “When we started off, it was hard to get (investors) to put even 10 percent in international funds,” he said.
It’s a little easier now, but many investors’ portfolios are underweight in international stocks, he says. People in general are just starting to come back to stocks after leaving following the 2008 financial crisis, Moffett says. “They’re making a slow transition, starting to think again about long-term goals,” he says.