Putnam manager seizes opportunities amid volatility

The equity market volatility that has sent some investors scurrying for the exits has introduced new opportunities for Joshua Byrne,
co-manager of the Putnam International Equity Fund (POVSX).
“We find that in a more volatile type of environment, like right now, people tend to anchor on the most recent data available,” he said. “If we take a longer and a wider view, we will see more opportunities to take advantage of the share price volatility.”
Mr. Byrne manages the fund along with Simon Davis from the London office of Putnam Investments, the Boston-based asset management firm that Great-West Lifeco Inc. of Winnipeg, Manitoba, is acquiring from Marsh & McLennan Cos. Inc. of New York.
Together, Mr. Byrne and Mr. Davis manage nearly $15 billion as co-chief investment officers of Putnam’s core-international-equity strategy.
The fund, which was launched in February 1991, represents $7 billion of that total.
The strategy, which Mr. Byrne described as “valuation based,” applies teams of equity analysts based in Boston, London and Tokyo to evaluate the potential of several thousand international companies.
The initial quantitative evaluation process applies 27 valuation factors to help screen the total universe of potential investment and to divide the companies into subcategories.
“We try to focus on identifying individual companies with cheap valuations,” Mr. Byrne said. Once a company is determined to be underpriced by the market, it is analyzed for future opportunities, he said.
“For every company we invest in, we build a balance sheet [and] income statement, and project future cash flow, which helps us value the business,” Mr. Byrne said. “Of course, much of the methodology relies on our own outlook and economic assumptions.”
The analysts are split into 13 different teams, each assigned to a specific sleeve of the portfolio modeled after a subsector target benchmark in areas such as European consumer or European financials.
The various analyst teams take smaller positions in the companies they like to help them beat their respective benchmarks.
These individual sleeves become part of the larger mutual fund but combine to represent less than 20% of the portfolio.
Mr. Byrne described the stocks selected by the analyst teams as a “component to signal the best names for the bulk of the portfolio.”
Although the co-managers ultimately are responsible for constructing and managing the overall portfolio, he said, all the ideas come from the sleeves managed by the analysts.
“We’re moving into a world where people are more specialized in so many areas,” Mr. Byrne said. “I’m never going to know as much about semiconductors as our semiconductor analyst.”
Although annual turnover typically is less than 100%, the use of teams to manage multiple subcategories leads to about 300 underlying positions in the fund. But Mr. Byrne pointed out that while the separate sleeves might hold a lot of stocks, the individual stock weightings are kept low until a company is promoted from an underlying sleeve to the larger portfolio pool.
The portfolio has exposure to more than 40 countries, with the largest weighting in Japan at 23%. The United Kingdom is second with a 19% weighting.
In terms of sector weightings, financial stocks represent 30% of
the total potential universe and about 27% of the portfolio. In the international-equity markets, no other sector represents more than 10%.
One favored position representing the financial sector is Zurich, Switzerland-based Credit Suisse Group (CS).
“We continue to like this company,” Mr. Byrne said. “Now that they’ve sold off their insurance unit, they’re starting to look like their larger competitor UBS [AG],” also based in Zurich.
Credit Suisse shares closed Friday at $71.83, up 2.8% year-to-date. The Standard & Poor’s 500 stock index was up 0.17% during that same period.
Another stock that has graduated successfully from the sleeves to the fund’s main portfolio is BHP Billiton PLC (BBL), a London-based company that operates oil, mineral and energy resource businesses worldwide. “This is a well-managed company that does a good job of allocating capital,” Mr. Byrne said.
The stock closed Friday at $44.65, up 21.2% since the start of the year.
Year-to-date through last Thursday, the fund had gained 2.5%, which compares with a 2.3% average return for the foreign-large-blend category as tracked by Morningstar Inc. in Chicago.
Last year, the fund gained 28.2%, while the category averaged 24.8%.
Questions, observations, stock tips?
E-mail Jeff Benjamin at jbenjamin @crain.com.