Companhia de Bebidas das Ameri-cas is the kind of stock that portfolio managers like to talk about. Also known as AmBev, Brazil's largest producer of beer and soft drinks, its shares more than doubled in price in 2009 and analyst consensus estimates call for 22% growth in the company's earnings in 2010. "If you can't make money selling beer on the equator, there's something wrong," quips James Moffett, manager of the Scout International Fund, explaining why he thinks AmBev, his fund's best performer last year, should continue to do well in 2010.

AmBev is more than a play on Brazil's growing thirst for beer. It also represents the potential success of companies around the world positioned to tap into a growing emerging market consumer base. To Moffett, the best way to reach those consumers is by investing in the larger mid-cap and smaller large-cap spaces, areas that offer exposure to global companies but leave room for growth.

The 68-year-old Moffett, who has managed the fund since its inception in 1993, pinpoints broad economic trends and then looks for companies poised to take advantage of them. Those companies must have a history of above-average earnings growth and healthy balance sheets. Scout International spreads its allocation widely among 92 holdings, with the largest one representing less than 2% of assets. The fund's measured approach, along with a reasonable 1% expense ratio, has helped it earn a five-star Morningstar rating, as well as top ratings from Lipper and Standard & Poor's.

Leading The Charge
As Moffett sees it, the worldwide economy is in the process of turning around, and the two main drivers are the U.S. and China.

In the U.S., he says, it looks as if the economy has bottomed out and will continue to improve gradually. While reports of tapped out consumers and huge budget deficits continue to dominate headlines, corporate balance sheets are in better shape than they've been for a long time. The overall health of corporate America lays the groundwork for mergers and acquisitions and capital expansion, particularly in technology.

In China, government efforts to rein in inflation by curtailing bank lending have raised what Moffett considers an inordinate amount of speculation about future growth. "All that means is that they took their foot off the pedal a little bit. Instead of growing 10%, the economy might grow at around 8%. There isn't going to be any major shortfall," he contends.

Although he sees China as one of the drivers behind economic growth around the world, he won't invest directly in companies based there because of what he considers their poor corporate governance standards and lack of transparency. "There's also a lot of government control. When the government tells banks to lend, they comply. When it tells them to stop lending, they do that. Many companies are also partially owned by the government. From an investor's point of view, all that government intervention creates additional risk," he says.

He also thinks the market is showing signs of overheating. People used to ask him how the fund was positioned in terms of sectors and countries. Now their big question is how much the fund has in China. "At a gut level, that's a warning sign," he says.

Instead, he prefers to get China exposure by focusing on companies that do a significant amount of business there. Many of them are based in Brazil, whose exports to China now exceed those it sends to the U.S. Moffett's fund has a roughly 17% exposure to emerging market countries, with 4.5% in Brazil.

Many of his indirect China plays focus on raw materials and energy companies, including Australia's BHP Billiton, one of the world's largest producers of iron ore, aluminum, specialty metal and coal. The fund has also increased its weighting in raw materials companies such as Vale, the Brazil-based metals and mining concern that produces industrial materials such as iron, nickel, coal and copper and also has investments in energy and steel businesses. South Korea's POSCO, the world's fourth-largest steel maker, is another commodity-related play with ties to China. The company plans to expand capacity by 25% over the next few years as the global economy improves.

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