Forty years ago, when most people put their savings under the mattress and the sophisticated put them in bank accounts, OppenheimerFunds was one of the pioneers of mutual fund investing. Since then it has been in and out of British ownership, through management buyouts, purchased by insurance companies, as well as multiple recombinations with its original partners, brokers Oppenheimer Company and Oppenheimer Capital. In the last decade it added the Quest for Value Funds, Rochester Funds, and Connecticut Mutual’s funds to its extended family of 65 offerings to investors.
One thing has been consistent, though: it has grown massively. It currently manages $130 bn, of which $18 bn is run by the global and international team. In fact, OppenheimerFunds (sic) was one of the pioneers in American portfolio investing abroad, and began to break the ice of American investor insularity with a global fund in 1969.
The company is a pioneer in other ways as well. There was no glass ceiling when chairman and CEO Bridget Macaskill climbed to the top of the organization in 1995. Of course, there have been better times for mutual funds than last year’s dramatic demonstration that the phrase ‘investments can fall as well rise’ was more than meaninglessly lawyered small print on the prospectus. However, Macaskill plays upon Oppenheimer Funds’ longevity to reassure investors that the company has seen all this before and will steer their assets safely away from the abyss.
Some may consider their spiel anodyne. ‘We believe that in order for you to reach your financial goals, your investments must perform.’ It almost sounds like a casting call for the Financial Follies – but the performance of the funds says different.
George Evans, portfolio manager of the Oppenheimer International Growth Fund gave Investor Relations the rundown on how the company looks at the world, the economy, and investor relations from the other side. Fairly international himself – he’s half British, half American, and has read geography at Oxford – he knew where the rest of the world was, and then learned how to make money out there. He went to Wharton for his MBA. He came to New York seventeen years ago via Belgium and France, working at Brown Brothers Harriman before joining Oppenheimer over a decade ago. Since then he’s been working with the Global and International team and began with the International Fund, started just over five years ago. ‘It’s a morningstar, five-star fund – and over that time, top decile,’ he declares.
In a rigorous and efficiently old-fashioned way, OppenheimerFunds concentrates on the basics. ‘We are long-term growth investors and we pay a lot of attention to the price we pay. Paying attention to value doesn’t just mean looking at bottom decile of the price to earnings, price-to-book, or whatever. You have to have some sense of what kind of business it is, what potential it has, what sort of profits it can generate.’
That means the IRO of Consolidated Widgets of Rustbelt, Pennsylvania need not apply. ‘For example, you can do all the restructuring you like in the paper industry, but in the end it doesn’t make the industry worth investing in because historically it has ghastly returns that barely cover the cost of capital. It’s a low barrier to entry, it’s a commodity. So we’re very unlikely to go into old smokestack industries, no matter what.’
‘We like branded goods a lot,’ Evans claims, ‘And they fit in emerging markets.’ For example, he points to German personal-care company Wella, ‘Part of its attraction, is that it has a big business in Brazil, and that they’ve been doing some restructuring after ill-advised over-expansion in the early 1990s, so their stock was just so cheap. It was not going to get to L’Oreal valuations but it was extraordinarily inexpensive, one-sixth of the valuation, so we bought it after some bad news was announced.’
Global and international
The main difference between ‘global’ and ‘international’ is that Evans cannot invest in the States. Of course this raises the increasingly common question of what passport a company has – do its American operations make BP ‘international’ or US? Is it who owns most of the stock?, or where it does most business? Evans shrugs. For OppenheimerFunds the primary listing is what counts. But otherwise his fund only has self-imposed limits. ‘Most of them are global companies, regardless of where they are listed. Global investment is the way forward – the best companies in the world. Buy those that offer the best value to investors, with a good long-term return,’ he avers.
Evans thinks most investors have an exaggerated view of currency risks. ‘Equity tends to compensate for currency moves. For example, people say the euro’s down, so don’t invest there – but that makes them 20 to 30 percent more competitive than their American rivals.’
Oppenheimer’s ground rules preclude investment in countries where minority shareholder rights are dubious or unenforceable. That rules out Russia and a lot of China. ‘Americans have an obsession with China, but I think that India has much greater potential.’ The problem with emerging markets is that there are very few world-class companies to invest in. It takes a lot more than being connected and protected and highly profitable to be world class.
By contrast, he points out that India has a hundred-year old stock exchange, a stable legal system and, more recently, active investor relations: ‘New companies are falling over backwards to be open and honest from an investor relations point of view, to the point of warning people of impossibly worst-case scenarios.’
‘The Indian IT sector has really smart, well-run companies with an in-built massive competitive advantage that makes them 30 to 40 percent more competitive than their US rivals, with equal quality. When [India-based technology company] Infosys was very high, we didn’t hold it. But now that it’s at a third of the price, we do – it’s a very, very good company that should do even better in this environment of tight budgets.’
In keeping with the Indian theme, he makes an eloquent case for why ‘the right way to invest’ is not an empty slogan. Without getting Hindu, he explains how the word ‘mantra’ explains his investment strategy: M-A for mass affluence; N-T for new technology; R for restructuring; and surprisingly, A for aging. These are the areas the fund concentrates on.
Mass affluence
Mass affluence excites OppenheimerFunds. ‘The rich are getting richer and more people are getting rich. The number of people earning over $100,000 a year has grown much faster than the average income would lead you to believe, so for the last ten years luxury goods have been a great business, other than cars,’ he explains. With the exception of Tiffany’s, arguably all the luxury goods are European brands founded between 1750 and 1950: their products are expensive, which is the whole point of them being exclusive luxury goods. ‘There’s a barrier to entry, and there’s embedded very, very high profitability.’
With the recession, ‘We reduced exposure from its high, but we are always looking for a way to get back in,’ Evans confesses. ‘Two years ago, with the bubble, there was probably unrestrained spending on Madison Avenue, and even though they have some resilience they do have some economic sensitivity.
Even so, some of the luxury goods groups have come through with great numbers, like Bulgari.’ Evans defines the luxury sector quite tightly, distinguishing between luxury goods or more sensitive fashion items. ‘We prefer the hardcore: Bulgari, Tiffany, Cartier, etc are more timeless. They have a lot of potential to grow further through sheer geographical expansion, so to some extent they can ameliorate the downturn.’
Of course mass affluence means people have more money, so Oppenheimer looks at companies that deal with it. ‘The propensity to save might wobble a little, but if you are making lots more money, then you are bound to be saving more actual dollars. So private banks are good investments, and long-term asset gatherers, like big life insurers, are great companies to invest in.’
New technologies
Many of Evans’ definitions are different from traditional ones. ‘New technologies’ means much more than Nasdaq’s electronic bytes. For OppenheimerFunds, it includes biotech companies, with items like drug-delivery systems – time release pills, better delivery techniques to the spot, needle-less injections, etc. ‘I’m a physical coward, so I’m quite keen on that,’ he confesses.
He adds, ‘Most people think of N-T as something geeky that businesses buy, but they should have consumer apps as well.’ He is big on games consoles and games software. He claims that over the decades each new generation of games has created bigger markets. ‘The games have their own cyclicality tied into hardware developments, rolling almost unaffected by the bumps in the economic road. We think that it is going to grow incredibly fast in the next three years, rolling out in US, Europe and Japan.’
One would think that investment in media content could fill the vacuum created by this expanding multimedia universe, but Oppenheimer is not very open to content provision. ‘The [celebrity] who is being watched knows that he or she is the reason the customers are watching. Most content providers, therefore, have to pay away a lot of the excess profits to the stars. With video names, the companies get most of the profits themselves. They pay programmers and designers well – but they aren’t star properties to nearly the same extent.’
Restructuring
Restructuring always creates opportunities and with the spread of shareholder value globally, Evans and his colleagues are on the lookout in Europe and Asia with closer scrutiny on Germany and Japan. He is very bullish about prospects for Japan, except when it comes to banks and real estate. ‘Some companies there are going very cheap, and Japan is still a world economic power with great companies,’ he says, holding up Toshiba as a shining example.
Aging
At the end of the mantra is ‘aging’ – how to invest to take advantage of the changing demographics of most affluent countries. ‘Aging gives a lot of oomph to savings,’ he says, pointing to Italy, where distrust of social security’s solvency has raised gross inflows into equities and mutual funds to a much higher level than the US. However, there is also opportunity in the goods and services those savings will be spent on. ‘Companies working with Alzheimer’s, kidneys, et cetera – you can’t put everyone who’s old into the hospital. Telemedicines, home monitoring, they are going to be huge to allow people to be in their homes. There will be technical, organizational-drug solutions to allow home care.’
IR through the looking glass
Evans says there has been a global shift in IR over the last five or ten years. ‘The world has become much more aware of the capital markets and what they require. Companies are much more aware of the spin in the message they send out to the market, of the need to be unambiguous.’ Even so, he gets few cold calls from companies targeting, and with his preference for companies with a history to prove the future, IPOs are off his radar. ‘If you’re making three-to-five-year views like us, you’re much less affected by whispers, the short-term disclosure stuff about coming in above or below expectations.’
Rather, he wants IR professionals to give him information that will help him understand the nature and the economics of the business, as well as the competitive environment. ‘There’s an obsession with short-term news, trying to out-guess others, but that’s just not our business.’
One result is information overload, fuelled by internet technology and corporate paranoia about Regulation Fair Disclosure. Evans advises companies to get their information out into the public domain, ‘but should they e-mail every investor who has ever shown an interest? No.’
‘I keep telling people to take me off their mailing list. It’s not that I’m not interested in the company, I just can’t follow every scrap of information that comes out,’ Evans quips. ‘There has to be some kind of information management tool to deal with it all.’
