Moffett has also upped his indirect banking exposure to China through banks that do business there, such as Standard Charter. Based in the U.K., the bank has seen strong earnings growth thanks to its presence in Asia and other emerging markets and also thanks to its ability to keep a tight rein on costs. Another U.K. bank the fund owns, HSBC, has significant operations in both Hong Kong and mainland China.
As for individual countries, the fund is underweight relative to the benchmark MSCI EAFE index in the U.K. "Frankly, the country has lost its capitalist edge since Margaret Thatcher left office. There are just better places to invest," he says.
He's also wary of Japan. "The thing that helped us the most in country allocation last year was not owning Japan," he says. "That's something we're in the process of reviewing now. Companies there pay a lot more attention to profitability than they did when I started the fund 15 years ago and there's a new finance minister in place. We could see some positive surprises going forward."
Canadian companies, which aren't part of the index, occupy about 6% of the portfolio. In part, the allocation is a play on raw materials through companies such as Imperial Oil, one of the country's largest producers of crude oil and gas, and Enbridge, a leading energy transportation, distribution and services company. He also has holdings in the financial sector, including Toronto-Dominion Bank and the Royal Bank of Canada. "The U.S. has always looked down on Canadian banks as too conservative," he says. "But good regulation, a cleaner mortgage market and no esoteric derivatives have kept them out of trouble."
The fund also has a small allocation toward U.S. stocks, which aren't included in the index. The exposure underscores his belief that the U.S. economy "will probably do better than Europe's this year."
In Europe, where the fund has about 55% of its assets, economic problems and historically high budget deficits in Greece, Spain and Portugal "will be a drag on the rest of the European countries for quite a while and prolong the recovery process," he says.
Earlier this year, Greece avoided a potentially disastrous default on its debt by raising cash with a new bond issue. Although other countries in Europe have pledged support for their less fiscally sound neighbors, concerns remain about the impact the financial headwinds could have on the rest of Europe.
The fund's only exposure to Greece is through Hellenic Bottling, the second-largest Coca-Cola bottler and distributor in the world. Moffett says the company is largely insulated from the country's financial woes because it does business in a variety of locations, including the growing Eastern European market. Another holding from the troubled region, Spain's Banco Bilbao Vizcaya Argentaria Bank (BBVA), is "a well-run bank that happened to be based in a country with a bad economy. It has very conservative lending practices and higher reserve levels than most banks in the U.S." BBVA has operations in Mexico and owns Compass Bank in the U.S. through a 2007 acquisition.
To Moffett, the weakening of the euro since last year is a double-edged sword. It's a negative for investors who will not have the benefit of a currency tailwind that they've enjoyed over the last several years. At the same time, currency translation could help boost revenue for companies in Europe that do lots of business elsewhere such as Germany's Siemens, which distributes its electrical engineering services and electronics products throughout the world. On the other hand, retailers and others without such geographic reach are likely to suffer.
If economic growth in the region continues to lag that in other parts of the world, Moffett thinks the euro could weaken further against other major currencies. Nevertheless, he does not hedge currencies in the fund because it increases transaction costs. Since Scout International is essentially a hedge against the U.S. financial markets, he believes that "it doesn't make sense to hedge a hedge."