Morningstar Advisor - February/March 2010 - 56

Undiscovered Managers Jim Moffett Scout International Fund UMBWX $18K 15 MSCI EAFE 12 9 borne out by Scout International’s turnover rate. The 2009 figure of just 16% is typical throughout the fund’s history. In 1999, the height of the day-trading frenzy, Moffett didn’t catch the fever; the fund’s turnover rate that year was 8%. Yet the fund still gained 31%, 4 points more than the MSCI EAFE Index. (The average turnover rate for a foreign large-blend or foreign large-growth fund is nearly 100% per year.) As befits a history major, Moffett is more interested in a company’s story than the detailed numerical analysis beloved by many financial professionals. Although he certainly takes a company’s financials—and valuations—into account, he concedes that he’s “not a gear head or a quant.” He’s more attuned to what’s driving a company, the industry, and the economy. He differs from the pack in other respects, by both paying attention to the benchmark index weightings and being willing to differ sharply with them. Most fund managers either try to stay close to the weightings or, in the case of stubborn individualists like Longleaf Partners or Third Avenue, completely ignore them. Moffett thinks that having a well-diversified portfolio is important to reduce volatility and also serves as a check in case he makes a mistake in judgment. The portfolio is well balanced, with healthy allocations to most sectors and regions. Yet he’s been willing to differ drastically with index weightings. Currently, for example, the two top countries in the MSCI EAFE Index—by far—are Japan and the United Kingdom; each has a 20%–21% weighting. While many managers underweight Japan, and some the U.K., few go as far as Moffett, who currently has just half of the index weightings in each market. And rather than wondering if he should raise that Japan stake to move closer to the index, Moffett says that he recently discussed with his colleagues why they even have as much as they do. He says that it’s tough to find the kind of growth prospects he likes in Japan. Still Fun After All These Years A manager who has been running portfolios since the 1960s provides a level of reassurance that advisors prize. On the flip side, it inevitably raises a question as well: How long will he continue to manage this fund? Moffett says that he’s not looking to get out anytime soon. “There’s no timetable,” he says. “This is a great business. Most of the time it’s fun.” He adds that a patient investor such as himself even welcomes the challenge of a rough market environment, hoping he can locate the opportunities unearthed by the tumult. When pressed for an estimate of his future tenure, he says that he plans to stick around “at least several years,” and then adds with a laugh that he’s been saying “several years” for several years now. It’s a legitimate question, though. After all, although he’s got an able and experienced team, none of his colleagues has Moffett’s lengthy record as a sole manager of an international fund. His comanager on Scout International, Gary Anderson, has been working with Moffett since 2000, and Michael Stack, the comanager on a newer small/mid-cap fund, Scout International Discovery UMBDX, joined in 2006. They, along with director of research Michael Fogarty, would be the main candidates to succeed Moffett if the firm didn’t look outside the firm for a replacement. For now, though, Moffett has no plans to go anywhere. “It’s not a physically demanding job,” he points out, contrasting himself with a football quarterback who, no matter how talented or intelligent, must bow to declining physical skills at some point. He sees no reason to stop “as long as it keeps rolling along.” At least advisors don’t have to worry about one thing: Unlike some investors, for this veteran manager, the wear and tear of a grueling travel schedule won’t force him to hang up his BlackBerry any sooner than he otherwise would choose. K Gregg Wolper is a senior analyst with Morningstar. Categoroy Foreign Large Blend Morningstar Rating Expense Ratio (%) 1.02 5-Yr Anl Total Rtn (%) 7.52 5-Yr Anl TR % Rank Cat 8 QQQQQ Minimum Investment $1,000 Data as of Dec. 31, 2009. Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 fund shops. Moffett has never traveled much Jan-05Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Feb-08Jul-08 Feb-09Jul-09Dec-09 Feb-05Jul-05 Feb-06Jul-06 Mar-07 Sep-07 Mar-08 Oct-08 Apr-09 Oct-09 Mar-05 Sep-05 Mar-06 Sep-06 Apr-07 Oct-07 May-08 Apr-05 Oct-05 Apr-06 Oct-06 Jul-07 Aug-05 Aug-06 Aug-07 Jun-08 Aug-09 forMay-05Nov-05May-06Nov-06May-07Nov-07Apr-08Sep-08 Mar-09 Sep-09 research purposes—a rarity Aug-08 May-09Nov-09 among Jun-09 Jan-10 Feb-07 Dec-07 Nov-08 Dec-08 international-fund managers. He says that he simply doesn’t find visits productive. When he asks company officials about their business, he says, “everything’s always coming up roses.” Does he find Wall Street research, with its well-documented shortcomings, more useful? Moffett is one of the few investors these days who will say that he does. “Most Wall Street analysts know their companies,” he says. “They know what the best companies in their industry are.” In his view, the key is to take advantage of that knowledge while ignoring the brokerage houses’ price targets and buy/ sell/hold recommendations. “Price targets are a marketing gimmick,” he says. “They give an air of precision to a business that’s not precise.” No Gear Head Moffett notes that such recommendations derive from short-term prospects, and that’s anathema to him. His long-term view is 56 Morningstar Advisor February/March 2010

Morningstar Advisor - February/March 2010

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