With over $100 bn in assets under management, Scudder, Stevens & Clark is one of America’s oldest and biggest fund management firms, and global investing is its watchword. As investment adviser, Scudder has a clear mandate to push 30 per cent of US investors’ assets into global markets. As fund manager, its portfolios hold more international and global equities than domestic ones.
Scudder manages over $40 bn in a variety of open and closed-end funds for some 2 mn shareholder accounts, with the rest invested for private and institutional clients, in trusts, endowments, and pension plans. Abroad it manages the Luxembourg-based Global Opportunities Funds; advises an array of offshore private label funds; and provides asset management to institutions in Japan, Europe and the Middle East. In all, Scudder manages over $20 bn internationally from developed and emerging markets.
The trend to increased institutional business at Scudder started in the 1970s, with institutional assets growing from 30 per cent of the total to around 80 per cent. Much of the shift was related to pension legislation, especially the Employees Retirement Income Security Act (Erisa) of 1974 and the 401 (k) plan for corporations in 1978.
Mutual funds have always been a key contributor to the business mix at Scudder, which now has 40 money market, bond and equity funds accounting for some $20 bn of assets under management. In addition, there is a family of nine funds managed for the American Association of Retired Persons (AARP) Investment Program, serving an AARP universe of 33 mn members.
Ever since it was first founded in 1919, Scudder has been a true innovator. It was the first independent investment counsellor for private investors in the US; it set up the first in-house research department (1924); the first no-load mutual fund (1928); the first US overseas investment fund (1953); one of the first small company stock funds (1970); and, one of the first no-load variable annuity investment products (1988).
More recently, Scudder launched the first no-load mutual fund investing in Latin American equities (1992) and one of the few open-end funds dedicated to small Pacific Rim emerging markets (1992). In 1995, Scudder launched a family of no-load mutual funds for Canadian investors.
Perhaps the innovation with the most impact on operations was the building of research capacity. Though little research was carried out in the US until after World War II, Scudder developed a ‘statistical and analytical’ unit in 1926. Its desire to delve into a company before investing paid off prior to the Crash, as investment advisers pushed clients to reduce equity holdings. Today, Scudder follows a disciplined investment approach based on proprietary research conducted by over 50 in-house equity and fixed income analysts.
The research-based investment philosophy is best explained byTed Truscott, managing director of global equity research and formerly co-manager of the $540 mn Latin American Fund. ‘Our research team is structured to produce independent thinking on a global basis,’ he says. ‘We view the world as one large investment marketplace. Our scope is basically global, and we achieve this by marrying the perspectives of our industry and country analysts. The dual overlay is the hallmark of the approach and makes us different from other managers.’
During the 1980s and 1990s, Scudder turned its bond and equity research teams into a global unit. The 21 industry analysts focus on the US but they also tackle specific sectors on a global basis. Meanwhile, 14 country analysts cover individual countries or regions, blending number-crunching company-specific research with a more top-down approach that includes tracking political, economic and cultural trends. These teams are backed up by an additional 16 research assistants.
‘Research used to be gathering information,’ says Truscott. ‘Now, apart from some emerging market data, most data is accessible through electronic communications. The challenge is interpreting facts.’
He notes that Scudder’s independent analysts do not have to go to a central committee to have their buy recommendations approved; they are asked to rate stocks and recommend them in the context of what the organisation and the various portfolio managers are trying to achieve. ‘We are an idea shop. We like putting portfolio managers and analysts together, sometimes with companies, to discuss either company-specific issues or valuation of companies within an analyst’s territory of coverage.’
Scudder’s bonds activity is run out of Boston, stocks out of New York. The Tokyo office also supports the research effort. To attract analytical talent, the firm offers a dual career path as an incentive. An analyst can follow a dual career path to become managing director. Product leaders on the portfolio side have seven to ten years experience, with analysts clocking up anything from five to 49 years. Typically, analysts are hired with six to ten years experience under their belts.
The research is supported by technology. Truscott himself is armed with a NEC docking station 5000 that keeps him primed whether he’s on the road or in the office. Analysts use Netscape Navigator to surf the Internet; News Edge to deliver 15 minute delayed quotes; as well as First Call, Dow Jones and Knight Ridder. Bloomberg and Bridge terminals are also available.
Currently, Scudder has 25 portfolio managers who tend to work in teams, given the need for client service and the task of running a portfolio. Analysts and portfolio managers alike are measured over a rolling three-year period in an effort to encourage a long-term approach to investment. At the end of the day, Scudder does not work on a ‘star fund manager’ system. If a person decides to leave, the ability for another team member to carry on is critical. It is this depth that Scudder claims as a strength.
Recently, Scudder published a booklet entitled The 30% Solution, which argues that US investors should place 30 per cent of their assets overseas. Scudder president Edmond Villani is an advocate of international investing and this perspective permeates all aspects of the firm’s business. The firm’s established mission is to become ‘a preeminent global investment manager’. And it already offers funds which invest in virtually every part of the world and maintains offices in Europe and Asia.
In the global arena, Scudder is led by managing director Nicholas Bratt, head of global equities and one of the first to dabble in emerging market funds. Another global stalwart is William Holzer, the 46 year-old Englishman who runs the Global Fund, a $1.3 bn vehicle that has outperformed the Morgan Stanley Capital International Index by nearly 2 per cent a year since its inception in 1986. Holzer is supported by fund manager Alice Ho in the search for undervalued blue-chip equities in large international markets; the pair’s mandate is to invest ‘anywhere in the world and in all types of industries and companies’.
Truscott highlights a number of investment themes on the global front, as developed by Scudder analysts and portfolio managers. One example is large-scale corporate restructuring, particularly in Europe, as companies begin to concentrate on the highest value-added activities to compete globally. Truscott believes this can result in profits and exciting opportunities.
Another theme evolves around electric utilities in certain emerging market countries. These companies sell for much less than asset values or the replacement cost of existing facilities. Add to that the unwinding of regulatory structures, and Truscott feels these assets are set to gain value.
‘We are not focusing on the benchmarks,’ says Truscott. ‘The reality is that most of the time you are being measured against the benchmark, but managing yourself on thatbasis is like driving with your eyes on the rear view mirror. We are cognitive of benchmarks, but try not to be tied to them when coming up with our portfolio strategy.’
As for turnover, Truscott notes that because stock trading is expensive and can be hazardous, turnover is kept low. The average holding time is one to two years, with some stocks held as long as five years.
Scudder does not favour any particular valuation method, believing that different methods work for different industries. The firm wants analysts to use what works for them and for the industry they are covering. The bottom-line is picking stocks that outperform the industry or country group.
‘Most companies have well-staffed IR departments and that is where we start in our search for solid information,’ notes Truscott. ‘We are always looking for a meeting with the CFO or the head of operating units. Though it is hard and expensive to free up executives, most companies realise it is key to making sure their share price is better valued.’Growth and Income Growth and Income
The basic strategy of Scudder’s Growth and Income Fund is to look at dividend yields relative to the market and the history of the stock to determine fair valuation. In contrast with other styles, Growth and Income screens stocks on the basis of yield as opposed to a methodology based primarily on p/e, price to cashflow or price to book value ratios. But these ratios are also used to confirm the ultimate attraction of a stock.
With assets of $11.5 bn, the Growth and Income line is composed largely of the $3.5 bn Growth and Income Mutual Fund, the $3.8 bn AARP Growth and Income Fund, and some $3.6 bn in separately managed institutional accounts. ‘We do not insist a stock has a 5 per cent yield or more. That would lead to an undiversified fund focused on utility stocks, for example. We buy stocks that offer a yield 20 per cent over the S&P 500 yield. Today that is about 2.4 per cent, meaning Scudder will purchase stocks with 2.9 per cent yield and above,’ explains Lori Ensinger, one of four Growth and Income managers. ‘That is how we are distinguished from other growth and income managers. If the yield is not 20 per cent above market, we will not look at a stock. And we will normally hold these stocks until the yield drops to a discount of the market.’ Ensinger is joined by lead portfolio manager Robert Hoffman, Benjamin Thorndike and Kathleen Millard.
Growth and income stocks must first pass a quantitative screen. Every month Scudder screens 1,500 stocks and the 4-500 that pass are then whittled down to a universe of 150. Over time, the model tends to bring up some of the same names again and again, so the evaluation procedure focuses on new names where the valuation has clearly changed.
The second tier process overlays active management backed by fundamental research. For this the research team will hold meetings with senior management, preferably one-on-ones, at which they will ask questions about fundamentals and financial strategy.
Ensinger says that the same strategy applies to global markets. Some 12 per cent of assets are invested in foreign securities, but the management team tends to back away from emerging markets. In addition, the yield formula allows for the holding of UK, French, Spanish and Chilean companies, among others, but precludes most investments in Japan where yields are traditionally low.
The yield orientation has also precluded the buying of tech stocks in the US. ‘When technology stocks posted a return double the S&P average in the first-half of 1995, a few clients began to wonder whether we were missing out,’ says Ensinger. ‘But as it happened, they dramatically underperformed the S&P in the second half. The style provides competitive returns in strong markets, but it really shines when the market is weak. In other words, we preserve a client’s capital when the market is down, enabling us to produce above market performance over a full cycle.’
‘High relative yields signal many things,’ adds Ensinger. ‘They signal a stock that is temporarily out of favour, possibly misperceived in terms of risk, and in which investors have low expectations. For example, when we bought United Technologies several years ago, you could not pay people to own anything tied to the aerospace cycle. People are also asking why we own Ford when the market is expecting a consumer led recession, or why we are buying paper and forest product stocks when prices of the underlying commodities are declining. We do this because stock valuations at the time of purchase exhibited higher than average yields, telling us the stocks are already discounting the risk. Even if we see a recession, those stocks have probably seen most of the downside.’
The Growth and Income style tends to pick companies and sectors just when others don’t want them. ‘You may ask if this strategy is so successful, why does not everyone follow it?’ says Ensinger. ‘That tells us that many investors are loathe to own companies whose near-term earnings progression is uncertain, and which are hampered with a perceived risk. They shun those stocks in favour of names like Coke or Microsoft. Companies you can easily talk about in a cocktail party.’
No changes are planned for the future strategy of Growth and Income. ‘We firmly believe once a manager changes its stripes, more likely than not problems are caused,’ Ensinger concludes. ‘If we had backed away in mid-1995 when our clients pressured us to move to technology stocks, we would have bought technology stocks near the top. That could have caught us in a horrible whipsaw. As it is, we remained true to our style and came out of it well. That’s the advantage of a well-defined, proven investment discipline.’
