By Philip van Doorn, MarketWatch
The AMG Managers Pictet International Fund typically doesn’t follow its rivals into high-flying stocks, opting instead for deep research to uncover what often turn out to be “idiosyncratic” companies, said Ben Beneche, the fund’s co-portfolio manager.
Coverage of investing outside the U.S. usually is focused on emerging markets, especially China, as Alibaba /zigman2/quotes/201948298/composite BABA +0.88% , Tencent /zigman2/quotes/207908563/delayed TCEHY -0.13% and Baidu /zigman2/quotes/209050136/composite BIDU +0.0072% enjoy rapid growth as the government supports their virtual monopolies.
But you won’t find those names among the top holdings of the AMG Managers Pictet International Fund /zigman2/quotes/207445449/realtime APINX +0.41% . Beneche and co-managers Fabio Paolini and Swee-Kheng Lee favor companies including British medical-device maker LivaNova PLC /zigman2/quotes/208121019/composite LIVN -1.69% , Switzerland-based food company Nestle SA /zigman2/quotes/208115528/delayed CH:NESN +1.60% and Japan Tobacco Inc. /zigman2/quotes/208255672/delayed JP:2914 -0.12% . Nine of the mutual fund’s top 10 holdings have posted gains over the past three years, the sole exception being Anheuser-Busch InBev SA /zigman2/quotes/203831500/delayed BE:ABI +0.33% .
“We do not think we have an edge in terms of predicting the cycle of future political events. We have an edge in playing the long-term game of buying attractive companies at attractive prices,” said Paolini, who heads the AMG Pictet International funds’ strategy.
Beneche said the fund’s management team is being “extremely selective in order not to be caught by severe [price-to-earnings valuation] multiple contraction or earnings contraction.” Concern over inflated valuations is no doubt weighing heavily on U.S. investors weathering a sustained selloff for stocks.
One area Beneche believes has gotten frothy is semiconductors, which is backed up by this chart showing the five-year performance of the S&P 500 semiconductors subsector against the S&P 500 Index /zigman2/quotes/210599714/realtime SPX +0.22% :
It has been an incredible five-year ride for semiconductors, as investors expect the industry to stay on a rapid growth path because of the internet of things — the trend for consumer devices and home appliances to be connected to the internet.
But Paolini says many stocks in the industry are now overpriced.
“It is fair to say we are seeing signs of high margins and unsustainable levels of profitability in some elements of the semiconductor supply chain,” he said.
Still, the fund has some exposure to semiconductors, including ASML Holding N.V. /zigman2/quotes/206208657/delayed NL:ASML +0.26% , its ninth-largest position as of Dec. 31.
Three stock picks in Japan, South Korea and France
Beneche described Cocokara Fine Inc. /zigman2/quotes/209455928/delayed JP:3098 +1.21% as “one of the long-term winners” as Japan’s pharmacy market consolidates. Unlike in the U.S., where two drugstore chains dominate the pharmacy space, the top 10 chain companies in Japan make up about 40% of the market.