At the Prospector Capital Appreciation Fund, about 12% of holdings are blue chip multi-nationals such as Johnson & Johnson, Abbott Labs and DuPont. In previous years, such holdings have been so low "that we never bothered to calculate the percentage," says manager Rich Howard.
What's changed? Valuation for one thing, Howard says. The flow of assets out of the equity market has created irresistible valuations in some cases. "They're much more undervalued than they've ever been," Howard says. But, he says, the exposure these companies provide to emerging markets is another compelling incentive to own them-especially for managers such as Howard, who do not specialize in emerging markets.
"I'm not an expert in emerging markets or their companies and I usually avoid them," he says.
John Augustine, chief investment strategist for Fifth Third Private Bank, has increased the size of his overseas holdings from 8% to 30% since 2001, with the biggest jump in those types of companies occurring over the past two years. The international holdings are about equally split between companies domiciled in emerging markets and those in nations with developed economies.
Whether the focus on international revenues increases will depend on whether the pace of U.S. economic growth catches up to the global growth rate, he says. "When you look at the big picture, we unfortunately are at a speed that is frustratingly slow," Augustine says. "We're recovering at 2% when we should be recovering at at least a 3% GDP growth rate."
At Wintergreen, the portfolio's foreign holdings have gone from about 35% to 70% over the past five years, Winters says. It's simply been a case of the fund chasing opportunity, and finding that the trail leads overseas, to companies such as Switzerland-based Nestle, he says. The world's largest consumer goods company, Nestle yields 3% in Swiss francs, does business all over the world and has achieved 6% organic growth this year, he notes. The company's emerging market revenues have gone from 25% to 35% over the past ten years.
"They make products that people buy everywhere-coffee, chocolate, baby food. It's a relatively low-risk way to participate in what's going on in the world," Winters says.
Cote feels globalization's impact on the U.S. equity market is not only sustainable, but permanent. Although he predicts the 2011 investment market will be similar to this year's-in the low double digits-he feels there will continue to be a strong connection between U.S. revenues and global markets. He feels the global growth rate will be sustainable because of unbridled growth of the middle class in emerging markets.
"What people don't understand is that the global emerging big eight-China, India, Brazil, etc.-now produce more of global economic growth than the U.S., plus the European Union, plus Japan put together," Cote says.
There are also signs the U.S. economy, while recovering slowly, is poised to pick up the pace, says Jim Swanson, chief investment strategist for MFS Investment Management. Noting that S&P 500 companies are holding more cash than they have since 1955, Swanson says, "These companies have reduced their risk profile and learned how to make money with less cost. Productivity is aligned with profitability."
Other positive signs for the domestic economy are increased corporate capital outlays and a housing market affordability index-a measure of how easily the nation's family can buy a house-that is at a 35-year high, he says.
"All the numbers are adding up to growth," he says.