Rounding out the top ten country list are France (11.3%), the Netherlands (9.4%), Switzerland (6.9%), Hong Kong (5.1%), Spain (4.5%), South Korea (3.1%), Germany (2.7%) and Ireland (2.7%). Top sectors include a 23% stake in financial stocks, followed by an 11% allocation to food, beverage and tobacco, and a 10% position in telecommunications services.
To find undervalued securities, Hartford screens his international universe, which includes the 3,400 companies with market capitalizations of at least $750 million. Earnings yield, which helps gauge a stock's equity risk premium, is one of his more interesting value screens. "It's the opposite of a price-earnings ratio, which you get by dividing a company's price by its earnings," he explains. "To get an earnings yield, you divide earnings by price." For example, a company with $1 in earnings priced at $20 would have an earnings yield of 5%. To pass through the screen, a company's earnings yield must be at least 300 basis points higher than the prevailing yield of ten-year bonds in a particular country.
In addition to a healthy earnings yield, a company should also have an above-average dividend yield for its native market. Hartford defines dividend yield, which he also calls the payout yield, as all returns of capital to investors. The figure takes into account stock buybacks as well as dividends. To qualify for inclusion in the portfolio, companies in the United Kingdom should have a dividend yield of more than 3.75%, the country's market average, while stocks of companies in Germany should have a dividend yield better than that country's average of 2.1%.
After the screening process whittles the list down to 150 or so stocks, he sets two-year price targets for each company. Generally, those with the highest price targets get the nod, although Hartford also considers the stock's volatility, both on its own and within the context of the overall portfolio, before buying. The fund generally owns between 60 and 80 large- and mid-cap names that Hartford will typically hold for three to five years.
Whether or not those stocks do well depends, in part, on how seriously a weaker dollar will impact profits of foreign companies doing business in the United States. "There is no question that non-U.S. companies vying for business with companies in the U.S. are at more of a competitive disadvantage then they were a year or two ago," says. "But consider that dollar weakness is taking place against the backdrop of an economic recovery that will more than compensate for the currency effect." While the recovery is most apparent in the United States and Japan, Hartford believes European economies will also pick up the pace in 2004.
A weaker dollar should also force foreign companies to become more efficient through corporate restructuring and cost cutting. "Assuming further depreciation of the dollar, many companies in Europe and Asia will be forced to implement another round of dramatic restructuring," he says. "I believe managers will implement the efficiencies necessary to protect profit margins and offset currency headwinds."
Other fund holdings, such as Norway telecommunications giant Telenor, will benefit from growth in emerging markets. Its managers are making effective use of the company's ample cash by deploying it into acquisitions in Greece and the former Soviet Union, says Hartford. The stock is up 76% in dollar terms so far this year.
Despite this year's recovery, European markets remain undervalued compared with those in United States, says Hartford. "In Germany, stocks fell 70% from their March 2000 high, and though they have recovered somewhat, they are still down 50%. The Swedish equity market has also gained its footing, but still stands 50% below its peak level." He adds that stocks in several European markets, though not the same bargains they were in March, still trade at price-earnings levels well below the averages here.