Manager defends conservative approach

Some people might describe the American Beacon International Equity Fund (AAIPX) as an international fund for the faint of heart because it doesn't expose investors to far-off and exotic markets. The $2.6 billion multimanager portfolio includes 180 stocks, with less than a 3% allocation to South Korea representing the most significant example of exposure to an emerging economy. "We think South Korea is the most developed of the emerging markets," said Kirk Brown, managing director in charge of the fund at American Beacon Advisors Inc. in Fort Worth, Texas. He makes no apologies for ensuring that the fund is managed consistently with a conservative bent. "We are focusing on the developed markets," Mr. Brown added, acknowledging the burden of a true value manager as being "early to sell and early to buy." The fund, which was launched in 1991, is managed by four managers oriented to underlying value, each of which was hired to maintain a strict adherence to bottom-up stock picking. "We're very much interested in long-term relationships, and when we hire a manager we don't want any surprises," Mr. Brown said. Templeton Investment Counsel Inc. in Fort Lauderdale, Fla., has been managing a slice of the portfolio since the fund's inception. Causeway Capital Management LLC in Los Angeles has been on board since 1993. Lazard Asset Management LLC in New York was hired in 1999, and The Boston (Mass.) Company Asset Management LLC was hired in 2004. Unlike a fund of funds, the multimanager portfolio divides the assets of the mutual fund among the underlying management firms, which invest the money through separately managed accounts. Templeton and Causeway are responsible for 30% slices of the fund's assets, while the managers hired more recently each have 20% slices. The managers are being gradually brought into balance by allocating a larger percentage of new investments toward Lazard and The Boston Company. A key component of the relationship between American Beacon and the subadvisers is the leverage that American Beacon can apply as the asset management arm of AMR Corp., parent company of American Airlines Inc., the nation's largest airline. According to Mr. Brown, American Beacon typically "stacks" much of its $65 billion under management to reach breakpoints that result in lower management fees for investors. While the underlying managers meet regularly with American Beacon, he said the overall strategy is anything but micromanagement. For example, wash-sale event penalties that occur when the same stock is bought and sold within a 30-day period do happen and American Beach doesn't deliberately guard against them, according to Mr. Brown. Despite having four independent money management firms dedicated to investing in mostly large-cap value stocks from non-U.S. markets, the annual turnover rate is about 40%. Historically, the portfolio of close to 200 stocks has included an average 30 to 40 stocks that were owned by more than one subadviser. The number of stocks in the fund held by more than one underlying manager has grown to 80 of 180, which is a situation Mr. Brown attributed to the state of the global equity markets. The fund's largest position, at 2.7%, is Munich, Germany-based Siemens AG (SI), a stock that all four underlying managers own. Sector weightings — just like country allocations — are a byproduct of the respective managers' bottom-up stock picking. That stock picking has tilted the overall portfolio toward telecommunications, health-care and pharmaceutical companies, producing a weighted average market capitalization of $71 billion. This compares with a $64 billion weighted average for the Morgan Stanley Capital International Europe Australasia and Far East Index. The largest country weighting is represented by the United Kingdom at 23.5%, which compares with a 22.5% index weighting. Japan has the second-largest country weighting at 13% and is also the most underweighted against the benchmark MSCI EAFE, which has a 20% weighting in Japan. The fund, which has a three-star Morningstar rating, had a five-year annualized gain of 20.6%, which compares with a 19.6% average annualized return for Chicago-based Morningstar's foreign large-value category. Over the 12-month period through last Wednesday, the fund was down 3.9%, while the category average was down 4.5%. Questions? Observations? Stock tips? E-mail Jeff Benjamin at jbenjamin@crain.com.