Fund Manager Thinks Globally, Acts Locally, Profits Nicely
Global economies put the spotlight on profits for American companies
Roy Papp likes the exotic flavors and spicy returns of global investing, but he also appreciates the gastric stability of home cooking.
So he orders the best of both worlds in his Papp America Abroad Fund.
And it's an investment philosophy that cooks. This year, and for the past five years, the fund has outpaced the US stock market, measured by the Standard & Poor's 500 index.
Mr. Papp goes global by staying local, investing in American companies with international sales, production, and profits, companies capitalizing on the global marketplace.
No ugly Americans
He and co-manager/daughter-in-law Rosellen Papp invest in US companies that pull about half their earnings from foreign operations. They include the likes of Coca-Cola and Microsoft as well as smaller companies.
Papp calls globalization "more important than electricity or the railroad" was to economic change in the 19th century.
And because he is so bullish on corporate America's role in the global economy, he recently launched another fund, Papp America Pacific Rim, with a similar philosophy - US companies with extensive operations in Pacific Rim countries.
Although Papp sees China becoming the dominant power it was before the industrial era, he says he remains confident that US firms can profit in the region, year in and year out.
Started with an inside look
Papp's interest in foreign markets developed during a two-year stint in Manila as US ambassador and director of the Asian Development Bank from 1975-77.
But that same experience made him skeptical about investing abroad. He noted that "foreign currency risks, accounting differences, social and economic differences" are precursors to the fact that "most markets in the world are not honest."
So at a time when mutual fund providers are prodding people to put a sizable chunk of their investments into foreign mutual funds, Papp's recommended foreign holdings are zero.
US firms, he says, are the most transparent and accessible for US investors. They have to disclose more about their financial activities. And they answer to regulatory authorities in the US, who frown on insider trading, family favorites, rigged markets, sometimes common in international markets.
US earnings also have less exposure to fluctuating currency rates and more exposure to the strongest, most stable economy in the world, the one back home.
The language of business
America Abroad owns stock in such companies as Microsoft, Hewlett-Packard, Manpower, and Interpublic, an international advertising agency that does business in 101 countries.
American advertising companies, he adds, look especially attractive. They hold a strong position almost everywhere in the world because of the preeminence of English as the language of international business.
Even if China continues its rapid growth, the linguistic dominance of the US will keep American companies in the game. Everywhere you go, he says, "It's your local language and English" that make the connections, whether it's between American and Chinese or Philipino and Singaporean business people.
The fund's success and recent publicity have boosted inflows into the funds. But since most of his investments are the big multinationals, Papp doesn't see the cash flow hurting his performance. He can invest new money quickly without becoming top heavy in one stock.
New era for stock values
And he isn't bothered by the heights to which these giant stocks have soared recently.
Back in 1957, he notes, people thought an ironclad law had been broken when the dividend yield on stocks fell below the yield on bonds.
Yet the expected "correction" from this anomaly never occurred, and investors now take for granted that bonds yield more than stocks.
Similarly, "maybe we're living in a new era," where stocks can sustain higher price-earnings ratios than bearish analysts foresee.
Not all companies deserve this premium, he says, just an elite few with the best talent and strategy.
"Education, experience, and special talents are worth unusually large amounts of money" today, whether for individuals like Tiger Woods or companies like Microsoft, he says.
He acknowledges that his ideas may be different.
"I try to think outside the box," he says. "And I succeed sometimes."