Morningstar Advisor - Fall 2007 - (Page 11)

Mark Headley Matthews Pacific Tiger Bob von Rekowsky Fidelity Emerging Markets Diana Strandberg Dodge & Cox International MAPTX FEMKX DODFX Now you can compare a Japanese bank to a Malaysian bank, a Chinese pharmaceutical to an Indian pharmaceutical. The markets and the economies were functioning more as independent islands 10 years ago. The region is becoming a broad pool of equities. Country-led contagion has diminished, corporate governance is fashionable, and financial data is both more readily available and of higher quality. Eastern Europe has made the most discernable progress. Asia has made steady progress, while Latin America continues to confound critics with its reform momentum. My highest-conviction stock ideas come from identifying secular trends that have great room to run. This includes investing in financials, infrastructure, and consumer-related stocks across most of the emerging markets. Some of these trends will also continue to benefit energy plays and telecommunications services. Honestly, our kids keep us all up at night more than our investing does! We hash out the risks and worry about potential pitfalls each and every day, so that we sleep at night and are well rested for the next day’s battle. In our business, things are always relative. In today’s world of some 250 basis points over Treasuries, some emerging markets are now net creditors to the world and are growing twice as fast as they were five years ago. This is a matter for actuaries and politicians. Most markets have progressed to more free-market mechanisms. Everyone has progressed. They might not be quite there yet, but they are making progress. Most countries continue to take two steps forward, one step back. Lenovo Holdings. It is the third largest computer distributor in the world. It is trying to build an incredible Chinese franchise into a global competitor. I believe the company will take the skills and power it has built in China and duplicate them to become the dominate computer distributor in the emerging nations. The U.S. economy. I see a lot that reminds me of the structural challenges that faced Asia in 1997. There is too much debt, too much of a belief that real-estate prices will sustain their trip to the moon, and a willingness to blame others for problems. No, but they can be currency plays. The yields on the U.S. Treasury do not justify the risks of a U.S. dollar. I’d rather have the equity risk. An area of interest is low-valuation Japanese companies, with low multiples of earnings, revenue, cash flow, that may be overshadowed by other things, like the need to address profitability issues or the need to restructure. Our three- to five-year commitments include Sony SNE, Hitachi HIT, and Matsushita MC. The usual suspects: increased protectionism, the need for more security issues, potential world events. Any world event would put a real stick in the spokes of the world economy. We think that is a better question for a bond fund manager. Not concerned. We don’t take that approach. We are all getting older and hopefully wiser. This has been an incremental, glacial process that will continue. That said, we do see signs, such as rising cash flow and rising dividends, in our current holdings and across Japan. But because the structures of many Japanese companies are large, interrelated share holdings, it just takes time. At Dodge & Cox, it was recognition in the mid-1980s that we needed to be thinking of the global competitors of our U.S. holdings. Kikkoman Soy Sauce Mr. China, A Memoir, by Tim Clissold No, there are still a lot of companies that move too slowly. Only about 30% of corporate Japan has “gotten it.” A lot of companies are still too bureaucratic, too slow to embrace change. The 30% will grow to 50% and those that don’t evolve will lose out. I mostly spend my time analyzing individual companies in emerging markets, but it seems that corporate Germany has made more discernable progress in the past five years toward flexibility and competitiveness than has Japan. A real belief coming out of my college education that the trajectory of Asian economies would be the most important in my lifetime. The Newport Tiger Fund. Russia at War: 1941-1945, by Alexander Werth International investing combines my avid interests in finance, economics, history, and political science. Telefonos de Mexico Untapped: The Scramble for Africa’s Oil, by John Ghazvinian Eight to 10. The real difficulty is dealing with connections and weather. In April, fog prevented us from landing in Cape Town, and we were diverted to Port Elizabeth. The upshot from that experience was another new city for my son’s postcards-from-dad collection. Eight, and I make sure I visit China at least twice a year. We have investments in 24 countries and visit more than that. I’m sure our team logs 1 million miles overseas annually. MorningstarAdvisor.com 11 http://MorningstarAdvisor.com

Table of Contents Feed for the Digital Edition of Morningstar Advisor - Fall 2007

Morningstar Advisor Fall 2007 Features Departments Letter from the Editor Inbox 10 Years After: Developing Markets Make Progress Research Briefs Investors Should Adjust Their Home Bias Few Mutual Funds Exhibit Serial Correlation Valuating ETFs, the Equity Analyst's Way It’s All About Location See the World (Differently) The Return of the Global Flexible Investor Map of International Value Sound as a Loonie? Fair Exchange In Their Own Worlds A Good Read Putting Their Heads Together Buying Protection Scoping Out Easy-to-Use Funds Finding Good Stewards Consumer Firms Go Global Mutual Fund Analyst Picks Undervalued Stocks Most Popular Variable Annuities New at Morningstar The Whole Wide World

Morningstar Advisor - Fall 2007

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