An Eye on the Heavens
Raymond Mills, who runs T. Rowe Price’s Overseas Stock fund, blends value, stability, and growth. Included are AXA, Novartis, and Bayer.
Growing up in New Jersey in the late 1960s, Raymond Mills watched Apollo rockets blast into space and dreamed of being an astronaut. Mills went on to work as a satellite engineer for NASA and earned a Ph.D. from Stanford in aeronautical and astronautical engineering. Yet, a voyage to the moon wasn’t in the cards.
Mills, 53, still works on guidance systems, in a way, though his strength is now financial and involves trying to pick stocks moving in the right direction. He swapped aeronautics for investing in 1997, when he joined T. Rowe Price as an analyst. Since 2006, he has run the Overseas Stock fund (ticker: TROSX), a $9.5 billion portfolio of foreign large-company stocks that he has successfully steered aloft. The fund returned an average 6.9% over the past five years, beating 84% of its rivals in the foreign large-blend category, according to Morningstar.
Mills looks for industries with favorable trends: financial companies with cheap shares and improving businesses, for example, make up 26% of the portfolio. Falling energy prices encourage consumer spending, which is why 17% of the fund is in consumer-discretionary stocks. Mills also likes companies with consistent growth and “disciplined capital allocation,” meaning management spends cash wisely. Rarely does he come across Goldilocks stocks that are both cheap and growing rapidly. So he builds a kind of matrix that factors in financial measures—such as price/earnings and asset ratios—to find stocks where, on balance, the fundamentals outweigh the valuation. “This is a core fund—not growth or value—it’s all of the above,” he says.
In building the portfolio, he creates a kind of bell curve with thick tails. In the mid-section are stable, mature large-company stocks such as Nestlé (NSRGY), Novartis (NVS), and AXA (AXAHY). The tails are where Mills is willing to hold a few deep-value or aggressive-growth stocks—investments that may be riskier but don’t reflect his assessment of future earnings and cash flow. T. Rowe’s analysts play a key role, presenting him with their best ideas. For every six ideas they offer, he usually picks one or two. He creates the portfolio himself, cherry-picking 157 stocks and spreading his bets; aside from some cash, no position takes up more than 2.5% of assets.
Mills can invest up to 15% in emerging markets, but he generally sticks with developed markets: Currently, 60% of the fund’s assets are in Europe, and 19% in Japan. Emerging markets account for only 4% of assets, and Mills generally prefers to tap their rapid-fire economies through companies domiciled in more-stable regions. Economic growth and stock market performance are not highly correlated, he says. Indeed, Australia and Sweden were two of the strongest stock markets of the 20th century, though neither had the fastest-growing economy.
Whatever the stock, Mills wants to see something he thinks the market is missing, whether it’s a new product line, strategy, or industry trend. That type of catalyst is often what gets a stock moving, and Mills aims to identify it before the rest of the market does. “Waiting for a catalyst is a prescription for buying high,” he says, “but I need to have reasonable expectations for one.”
A top holding, for example, is German conglomerate Bayer (BAYRY), which he has owned since 2011. The company is a steady earner and recently announced a plan to spin off its plastics unit, which is less profitable, lower growth, and more cyclical than Bayer’s life-sciences divisions, which include health-care and agricultural products.
French insurer AXA fits into the value camp. With a P/E around nine, it trades at a discount to many financial stocks. Profits have been hurt by low interest rates, but AXA is addressing that by selling fewer guaranteed-rate policies and more variable life and annuity products. AXA is also cutting costs and growing solidly in emerging markets. “We don’t think the stock will double overnight,” Mills says, but if rates inch up, it should do well, and investors are getting paid a 4.7% yield to wait.
AT THE OPPOSITE END of the value spectrum is a stake in Chinese Internet search engine Baidu (BIDU). This is no bargain stock, with a trailing P/E of 38. But it has a Google-like grip on search in China, and Mills thinks the market isn’t fully appreciating Baidu’s growth in the mobile space. Overall, revenue has surged 53% in the past year, and earnings per share are expected to climb 38% next year. While the stock looks pricey, margins are expanding while sales are rising—“a powerful combination,” he says.
Like any active manager, Mills doesn’t always beat the market. The fund trailed its benchmark in 2007 and 2008, and it’s in line with the index this year. It tends to trail in markets characterized by indiscriminate waves of buying or selling with less regard for stock fundamentals, he says. “We’re not going to outperform in every environment,” he adds, “and this is an environment where people are throwing money at things.”
Still, he’s willing to ride out a rough patch if he likes a company’s long-term outlook. One such stock: Swedish medical-device maker Elekta (EKTAY), down 35% this year (in U.S. dollars). The only big rival for its radiation-therapy equipment is Varian Medical Systems (VAR), and Elekta may have an edge with a new generation of machines that use magnetic-resonance-imaging technology to target tumors more precisely, reducing damage to surrounding tissue.
Looking ahead, Mills sees positive and countervailing market forces. While developed-market stocks benefit from monetary stimulus and falling energy prices, there are head winds, including anemic growth in Europe, a recession in Japan, and potential flare-ups over hot spots like Ukraine. Also posing a challenge: The rising dollar reduces foreign-currency returns for U.S. investors.
Mills is modestly underweight Europe and Japan, partly reflecting these concerns. But he generally doesn’t dial down regional exposures based on macro effects, preferring to invest wherever he finds the best individual stock opportunities. “Investing involves a lot more art than engineering,” he acknowledges, even with the best guidance and control.