Earlier this month, Dan Culloton, Associate Director of Fund Analysis at Morningstar, discussed global investment opportunities and risks with Diana Strandberg and Charles Pohl, managers of the Dodge & Cox Stock, International Stock and Global Stock funds. Some of the key points Strandberg and Pohl made were that they still see attractive valuations in the biotech and pharma sectors both in the US and Europe, whereas financial services and telecoms offer some of the more attractive opportunities in emerging markets. In terms of assessing global economic and financial headwinds, Strandberg and Pohl believe that the European debt crisis has created buying opportunities, while inflation risk is currently a significant concern.
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Biotech and Pharma Still Look Cheap
Looking at the investment universe from a bottom-up perspective, Strandberg and Pohl see attractive opportunities in the pharmaceutical and biotech companies in both the US and Europe. Past underperformance by pharma has created a significant valuation gap between this sector’s equities and other market segments, the managers said.
Financial Services and Telecoms Best Emerging-Markets Values
In terms of investing in companies domiciled in emerging markets, Strandberg and Pohl believe that valuations are still reasonable, particularly given the attractive growth perspectives and balance sheets in these countries. They measure the risks of higher inflation in terms of impact on a company’s margin structure, and therefore find fewer opportunities in energy and commodity companies, whose near-record margins could see cost pressures.
European Crisis Created Global Opportunities
“We were able to, in the international and global funds, increase our weighting in selected financial names in Europe,” said Pohl. However, “we don't equate country of domicile with where the opportunity lies,” points out Strandberg, and this observation prompted the fund managers to increase their holdings of Europe-domiciled companies during the market downturn.
Dodge & Cox: Inflation Risk Is 'Significant'
The Dodge & Cox Balanced Fund is currently invested 75% in equities and 15% in fixed income, reflective of where Strandberg and Pohl expect to see attractive returns. In an investment environment where the risk of inflation is high, Treasury bond yields do not offer sufficient compensation.