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Harnessing the Rising Middle Class Across the Globe
MassMutual Premier International Equity Fund
Interview with: Jason Marino

Author: Ticker Magazine
Last Update: Jul 02, 9:26 AM EDT
Established in 1995, the MassMutual Premier International Equity Fund capitalizes on the rise of the middle class across the globe. The fund relies on a bottom-up process to identify quality companies that are set to benefit from the long-term increase in the wealth of emerging market consumers and the proliferation of the Western lifestyle.

ďStructural growth is our thematic approach to investing. We look at dynamic areas of the market that are set to benefit from the rising middle class.Ē
A: We have a valuation discipline and we are certainly donít have portfolio holdings that are trading at a 60, 70, 80 multiple. For example, the Street right now is very bullish on energy, but this portfolio is underweight in energy because itís a commodity type of investment. Financials is another area that George Evan feels is highly regulated and without a lot of room for growth. The portfolio has been typically underweight in financials. The subadvisors are after structural growth, not just after growth in the next quarter. They are not beholden to what interest rates are doing or where the price of an underlying commodity is going.

Q: Can you describe your research process with a couple of examples?

A: I would use the example of HermŤs International S.A., the French high fashion luxury goods manufacturer. This is a play on the increasing middle class and the aspiration brands out there. People are drawn to the brand as they make money, but the core clientele tends to be pretty inelastic. As the middle class grows, it is buying more Hermes bags and products and the stock has became an attractive opportunity to play that structural growth theme.

Another example of a stock that has worked out well is Baidu, Inc. which was recently purchased into the portfolio. Oppenheimer purchased it for the portfolio because of the valuation, the growth, and the position of the company within China. The main factors were the growth profile that the company presented, the strength of the balance sheet, and the e-commerce growth.

An example of something that didnít work out is a company called Dignity PLC, a funeral services provider in the UK. This was seen as a very stable business with strong recurring cash flows. The industry is rather consolidated industry, but a new competitor came into this space. Then David Bowie, the English singer, songwriter and actor, did not want an elaborate funeral and went a more conservative route. That was a catalyst for change and many of the higher-end services and margins of the funeral services provider were squeezed out. The trend brought the name under pressure, so Oppenheimer revaluated it based on the change in the marketplace.

Q: Would you describe the portfolio construction process?

A: The portfolio is built from the bottom-up and is invested in structural, thematic growth and in companies with strong and defensible competitive advantages. The team looks at the supply chain in the industry of each company. It takes into account the ROE, the discounted cash flow, the cash flow and the economic value added of each of the prospective companies. Through the fundamental analysis and the upfront work, the team develops a focus list of 450 names.

We do not populate the portfolio with names until the market provides an opportunity to buy the company at an attractive price. Once there is an attractive point, they would typically build positions starting from 10 to 20 basis points. The team buys probably 10 to 15 names per year for the portfolio. They constantly revisit the holdings to see if they still merit investment.

The size of each position is a function of the conviction. If we have an exposure of 30% in Europe, 20% in Japan, and 10% in Switzerland, that exposure is a function of the bottom-up process. Sector exposure, again, is largely an outcome of the bottom-up research process.

Typically, we re-evaluate a security when thereís a higher risk, when the downside becomes outsized, when the positions overshoot their desired weightings, or when valuations become stretched.

We would sell a security if we lose faith in the management whether itís through a change in management or an ill-fated acquisition or an acquisition outside the core business. For instance, a French baker made an acquisition that was out of the ordinary and that move ultimately led to Oppenheimer selling the security.

The limits we impose are 3% for individual holdings, 25% for industries, and 35% for countries. However, for the emerging markets the limit is 25%.

Q: How do you define and manage risk?

A: For this portfolio Oppenheimer defines risk as permanent loss of capital. We mitigate that risk through the fundamental research. We believe that quality companies with strong secular drivers of growth, reasonable amount of debt on the balance sheet, and strong management teams are the types of companies that tend to do well over time. Identifying these quality companies is a big part of risk management.

Thereís also an independent risk management team at Oppenheimer as well as corporate level risk control teams. As managers at MassMutual, we look at risk from the standpoint of tracking error and return. We evaluate the concentration of the top holdings and we ensure that the portfolio is behaving in line with our expectations in any given market environment.

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