

Patience Pays Off for This Overseas Fund

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Fabio Paolini of the AMG Managers Pictet International fund keeps a list of stocks he likes, then waits to buy—and sell.

Micha Theiner for Barron's
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Fabio Paolini can talk about a stock for hours, literally. At a meeting with a prospective investor, the fund manager spent 2½ hours discussing the merits of one holding, without notes, earning him the nickname “Fabulous” among colleagues.

The co-manager of the $2 billion AMG Managers Pictet International fund (ticker: APINX) found his passion later in life. Growing up in Belgium, the closest he came to finance was watching his Italian father monitor short-term interest rates daily during the inflation of the 1970s. At university, Paolini studied economics because he thought it would be a good match for his interest in geopolitics and history. But he found it frustrating. “Economics is a bit dry and not an exact science, whereas investing is more multidimensional and interesting—and you can measure yourself. It is much more rewarding,” Paolini says.

In 1994, Paolini joined the financial research department of Swiss independent wealth and asset manager Pictet Group, moving three years later to Pictet Asset Management, which now oversees more than $185 billion. The 48-year-old leads the EAFE equities strategy and co-manages the International fund, which measures up well versus peers. This year, the fund has returned 21%, beating 74% of its foreign-blend peers, according to Morningstar. Over the past three years, the all-cap fund returned an average of more than 6%, outpacing 92% of its peers.

Paolini’s team, which includes two other co-managers, relies on seven sector analysts. The team often trades texts and emails about stock tidbits well beyond market hours and plays a running game of guessing metrics, such as the return on investment of a digital advertising billboard, versus a standard one.

The constant brainstorming fuels ideas for the fund, which typically holds 60 to 75 stocks. Its average holding has a market value of $40 billion, though some are as small as $500 million, and many are not well-represented in its MSCI EAFE benchmark. The team looks for companies that can grow cash flow and deploy it wisely. When they find candidates that make the cut, the team waits to buy them at a discount to their intrinsic value and holds them, on average, for five years—though some top holdings, including Nestlé (NESN.Switzerland) and Japan Tobacco (2914.Japan), have been held for a decade in the strategy that predates the fund.

Global economic growth has been improving, but U.S. stocks have dramatically outpaced foreign shares since the financial crisis, causing some strategists to view overseas shares as cheap. But Paolini looks at things on absolute, not relative, terms. After the 20% run in the MSCI EAFE index this year, he says foreign stocks pose some of the same challenges as those in the U.S. “There is clearly a lot of risk that something could go wrong,” Paolini says. “That makes us cautious.”

The fund’s geographic allocation has remained steady—it has 65% invested in Europe and the United Kingdom, and the rest in Asia—but Paolini has become more defensive over the past 18 months.

He’s gravitated toward businesses that haven’t done as well because of temporary issues. Take top holding Anheuser-Busch InBev (ABI.Belgium): Profits at the world’s largest brewer have been hit by a weaker Brazilian real amid the country’s recession that led to higher costs—and, apparently, Brazilians have been saving money by cutting back on their beer consumption. Meanwhile, a shift toward craft beers in the U.S. also hurt sales of its Budweiser and Bud Light brands. But Paolini notes that the company makes more than a quarter of the world’s beer, holds a near-monopoly in some markets, and has a foothold in emerging markets that sets it up for long-term growth. Adding to his conviction is management’s track record for savvy capital allocation that has included bold acquisitions—like last year’s purchase of SABMiller—that bolster growth without sacrificing profitability.

Paolini is a history buff, and looks for patterns in economic cycles and corporate behavior. Since companies tend to make the same mistakes over time, Paolini favors management teams with strong records and that are aligned with shareholders. That often means family-owned companies, such as SoftBank Group (9984.Japan) and luxury goods maker Cie. Financiere Richemont (CFR.Switzerland). He also likes French long-term and acute-care facility operator Orpea (ORP.France) for its consistency.

Orpea exemplifies another trait Paolini looks for: a dominant position in a growing market. Orpea benefits from an aging population: Beds are in short supply and regulation makes it harder for others to break in. Paolini likens it to a hotel with near 100% occupancy rate. The company has been under-earning because 20% of its network was built in the past few years, and Paolini says it can take four years for facilities to fill to a level allowing them to raise prices. That means earnings should get a lift soon.

Paolini likes companies that spend wisely, even if it is at the expense of short-term profits, because it sets the stage for long-term success. France’s Rubis (RUI.France), which distributes and stores petroleum products, has been using the hefty cash flow it generates to develop and buy businesses in locations where it can command a monopoly-like position. Chinese e-commerce outfit JD.com (JD) has been investing the prodigious amounts of cash it generates from controlling its own inventory, into its logistics services, which it plans to sell to other firms. Unlike larger rival Alibaba Group Holding (BABA), which is more of a middleman, JD.com operates like a traditional retailer, without the baggage of a brick-and-mortar presence. The stock is up 78% this year, but the team sees more upside. “It’s a $64 billion business, compared to the $454 billion market value of Alibaba. That creates a lot of opportunity still ahead,” says co-manager Benjamin Beneche.

Geopolitical events often offer a chance to buy stocks on the team’s watch list. The managers used the post-Brexit volatility to purchase global companies, such as BBA Aviation (BBA.UK), which operates private airports and gets 90% of its operating profit from the U.S., and mobile satellite company Inmarsat (ISAT.UK). Given the pace of geopolitical events lately, the team may have plenty more stocks to talk about.

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