UMBWX – UMB Scott International interview with James Moffett

Here is a re-print of my latest research piece . . . Enjoy!!!

Scout International Fund – UMBWX

Lee Munson and Lorn Davis interview James L. Moffett

In the world of mutual funds, only a handful of names stand out and James L. Moffett, CFA stands tall among them. Running the Scout International Fund (Ticker: UMBWX) since its inception in 1993, Mr. Moffett has garnered a reputation for running a tight ship that repeatedly beats its competitors and the domestic market over the long term. His strategy has remained consistent and simple: look at the international economic, political, and market conditions to choose which countries to invest in. Then, select the best blue chip companies each country has to offer in view of each economy’s prospects. Distinct from his competition, Mr. Moffett does not have analysts scattered in every country. Instead, he simply works with what is available to him and thus sticks to companies with a track record that have substantial product/service bases and financials. With this straightforward approach, he has, since the inception of the fund, managed to return 9.16% vs. 4.84% from the benchmark MSCI EAFE (Europe, Australasia, and Far East) index. So, not only does UMBWX have a solid foundation, but also a strategy we at Portfolio Asset Management can explain to our clients.

We recently were given the opportunity to ask Mr. Moffett some questions regarding his experience in managing an international stock fund and his current views on the market. We began by asking him what differences and similarities he has found in investing both domestically and internationally throughout his career. His answer came in three parts: first addressing the psychological aspect of investing abroad, followed by his simple method of checking the economic situation of a foreign country and finally, the cultural/political concerns. He began by saying that his “experience leads him to conclude the differences between our and foreign markets are bigger, but more subtle than they appear to be. In contrast, there are a lot of similarities we overlook.” As all investors undoubtedly know, at any given moment there is one or more “sure thing” to invest in, and this is magnified when considering markets beyond our own. Mr. Moffett’s experience has led him to understand the finer points of these frenzies so that he may be able to clearly differentiate them from actual trends worth investing in. He says, “For many investors, buying foreign stocks requires overcoming some domestic prejudices. In the process we often make the foreign market look better than it is; make it look like a unique opportunity to get in on the start of something big.” With all the talk about Brazil, Russia, India and China, other emerging markets, and even frontier markets, the present day investor is bombarded with more sensational “investable opportunities.” Mr. Moffett asks himself the pertinent question of whether or not he has learned anything given the fund’s 4.2% exposure to Brazil. He claims he has and expounds how:
1. “A similarity. Market psychology works the same around the world.”
2. A simple method of telling whether the situation in a country is worth investing in or not: “Look at balance of payments numbers and bank reserves you can see the rotten situations. Mexico, Thailand, Russia, and Brazil were swamped with foreign investment which covered up huge trade deficits. Today, some of the countries run a balance of payments surplus and have accumulated substantial reserves.”
3. As much as we want countries to become more investment friendly, “cultures change more slowly than we might hope. One way to measure this process is to look at how governments change. Brazil, Chile, and Mexico have had several successful transitions. This is more than having elections. We measure it by how the existing government goes out of office.”

This last point helped answer a question that we had been looking over for the past few holdings reports about whether he intended to stay out of Russia and China, even though China was specifically being touted as the “Economic Engine” of the world. Mr. Moffett continued, “One reason we don’t invest in Russia is their capitalist economy is not that different from a hundred years ago when the Romanovs ran the country. China is an intriguing mix of state control and economic loosening, again reflecting their long commercial history and long government from the top. India is the world’s largest democracy, but it labors under an incredibly inefficient bureaucracy.” This response reassured us of Mr. Moffett’s unshakeable commitment to safe capital growth in the international context and also that the fees charged by the mutual fund are paying for the experience of Mr. Moffett. However, this doesn’t mean that he will not in the future invest in a country such as China. As stated above, he looks to measure the progression into more capital friendly environments by how the existing government goes out of office.

Having covered this broader topic of the similarities and differences Mr. Moffett has observed while investing internationally, we asked him about how the fund was positioning itself for the unwinding of global quantitative easing by the various central banks. His response was simple and to the point, that the fund wasn’t too concerned about quantitative easing due to its being the stock market. More specifically, he says, “In the spring we drew down our cash reserves to modest levels and put most of the money in financials where we were substantially underweighted. As an unwind, we will probably restore this underweight.” The withdrawal of reserves worldwide is used as an indicator by Mr. Moffett, for “such a withdrawal should coincide with an economic recovery. As our portfolio is positioned for modest growth with overweights in consumer healthcare and technology, we think we should be in good shape going forward.” This optimism for the future of the fund is well seated when looking at the historical performance of the fund over the past 1, 3, 5, and 10 years, because not only has the fund consistently beat its benchmark indices (the MSCI EAFE and the Lipper International Fund Index), but it has actually managed to stay positive going back 3 years, a feat neither of its benchmarks were able to accomplish. Therefore, it is reasonable to accept Mr. Moffett’s optimism and we expect to see a continued strong showing by the fund as the global recovery develops.

A major factor in the development of the global economy is demand for energy and minerals. It has been China’s appetite for these that have given the country the label of the Global Economic Engine, as this demand indicates new economic development. So we asked Mr. Moffett how he would weigh the US, China and oil exporters. He responded that the fund has a neutral strategy on oil prices and is equally weighted in energy stocks in comparison with the benchmark. But given that he invests in international markets in addition to the US market, we were curious as to how the fund was going to deal with the savings from lower energy prices in the US versus the resulting losses sustained by energy exporters. Mr. Moffett granted us, “Lower energy prices are a tough call. While the worldwide economy has substantial oil and gas in storage, the production/consumption balance is tight. Major producers are under investing in new production. The swing factor is Chinese demand which keeps rising, not just for energy but most minerals. We have increased our weighting in steel and iron ore production. In terms of geography, we have increased our weight in Brazil and Korea.”

Wrapping up, the UMB Scout International Fund has been a steady, safe source of income for any investor looking to diversify through the international markets. Managed with a simple, fundamentally solid top down strategy, the fund really becomes attractive due to the experience of the management team led by Mr. Moffett. Under his wise direction the fund has managed to provide investors with impressive results over its 16-year history compared with its benchmark. Having the opportunity to have Mr. Moffett answer questions we had regarding the way he runs his fund and how he views the global economic situation enlightened us to the careful and precise manner in which he approaches the fund. Instead of running with what his gut tells him, Mr. Moffett has clear guidelines for countries and companies that must be met in order to be considered for investment. This thorough methodology is a welcome sign that Mr. Moffett takes his fiduciary duty seriously and gives us, at Portfolio Asset Management, confidence that the fund is a responsible and income generating investment.