Q: What was the history of Delaware’s international operation?

A: We were founded in 1990 by a group of English managers as a subsidiary of Delaware investments. Even then it was quite an experienced team of investment management professionals. They have been working together for quite a few years. Most of the original team is still with us and we now have a highly experienced investment team of 38 investment professionals that has worked together for many years under a common investment philosophy.

Since then, our total assets under management here in London have reached more than $17 billion. Of that $17 billion, about $14 billion is in equities, of which about $11 billion is in the Europe-Asia-Far-East (EAFE) mandate, whether it is retail or institutional. The International Value Equity Fund has also grown significantly over the past year or so.

Q: So, your track record as a fund is more than 10 years. What is your strategy now and has it changed somehow over time?

A: We are a value-oriented manager and we use a rigorous dividend discount model (DDM). That is what we are using in order to look for value in both stocks and markets. The beauty of that is that we don’t look only at the initial dividend yield, but also at the future real growth of the dividend as well for many years to come. We are long-term investors, we not only invest in companies for a long time, but we also analyze companies for a long period of time.

The key benefit of that approach is that it is aimed at providing a rate of return which is meaningfully higher than inflation. So we are not just looking for relative returns, we are looking for absolute returns as well, and that is because the real growth of dividends takes inflation into account. Some people consider it old-fashioned to look at inflation, perhaps, but history has proved it is always worth including in calculations of value.

Q: And you also apply the DDM to companies that aren’t consistent in their earnings or dividend growth?

A: Yes. Consistency is not necessarily important. It would make the analyst’s life easier in terms of making assumptions for earnings and dividends, but the lack of consistency would not necessarily preclude a company from being included in the fund. We are looking for value and if the value is there, it won’t matter so much if the money comes today or in three years, as long as the value in terms of present-day value is there. For every company we invest in, we make this very long-term forecast.

Q: What about the qualitative analysis of what a company really is?

A: First, I would run the screens and I would find companies that look attractive on an initial screen. Then I would add a “rough and dirty valuation.” I will quickly calculate the approximate value of that company using the DDM. And then, if I think that it is worth spending the time, I can take anywhere between one week and three months to really assess this company. Every analyst in this company uses the same analytical tools. We do the same DDM. You are not allowed to look at a company using any other analytical tool. As a result you get absolute consistency across the board. This way I can validly compare the valuation for a Japanese pharmaceutical company with that of a German automaker, or a U.K. retailer.

Q: But how do you get your data? The data obviously still comes from different sources.

A: We do our own fundamental research and the starting point is talking to the company. Usually, you have some experience either within the sector or you know someone who does, and this is your starting point, actually, but then you need to talk to the company. I have to go to Asia at least once a year if not twice a year and I have to visit all the companies or at least meet with management of all the companies that I invested in.

It is a very rigorous process. Each analyst has to present their assessment of a company to their peer group, which would be the Pacific team for me or the European team for a European analyst. Then you also have to present that work to the equity strategy committee, which is made of the four most senior members of the equity team. And until you have really proven yourself to really know and understand that company, the work you have done would not be passed and that company would not be able to go into the core list. It can’t get into the fund’s portfolio until the analyst clears all these hurdles.

You can really push it very fast. There is no set program, and if the company is really offering value, you can be surprised at how quickly you can get it through these committees. If we can get a good company into our clients’ portfolios, we can move very quickly. That is what we are paid to do. But equally, because we have very focused portfolio – the fund has 52 stocks and yet we have 39 investment professionals – you can imagine that actually we are not looking at that many stocks individually. Each of us probably has responsibilities for no more than ten stocks at most. So, we can really get to know those stocks.

Q: How do you define international?

A: For this particular fund, the vast majority of our assets are benchmarked against MSCI EAFE – that is Europe, Australasia, and the Far East. So, it is all the developed world that does not include the U.S. We have small exposure to the “soft end” of emerging markets – a little bit in South Africa and a little bit in Korea – about 1.5% in each. We have a fantastic emerging-markets fund, but I would not want to have exposure to the “hard” emerging markets like Russia or China in this fund. That is not what my clients pay me to do. My clients pay me to run an international fund. I don’t make that decision, and I believe I should not make that decision for them, because I don’t know what their risk profile is. I have to offer them something pure and then their advisor can make the necessary asset allocation decisions based on an individual client’s risk and reward profile.

Q: You mentioned that there was a great deal of interest towards international portfolios, but these past three years, the developed markets from U.S. to Europe, to Japan, have moved more or less in sync. Is there still a case for international diversification?

A: This is a question I am often asked. And yes, absolutely, in the past few years there was a much higher correlation. There were a number of reasons for that correlation. Partly, it was the tech and telecom boom and bust. We expect over the next few years that correlation to start to break down. My reasons for encouraging people to invest internationally, however, are not only to diversify, although it is important. We run the dividend discount model for all the different markets, and almost without exception, most markets offer much better value than the U.S.

Q: Where do you see your main advantages to the U.S.-based international money managers?

A: Many people consider London to be the center of the international fund management community – we are well positioned in terms of time zones, and well positioned for traveling out to all those different markets. We have an advantage particularly for Asia compared to America, because Asia is, of course, not so far away for us.