World Explorer

Dow crosses 14,000.” “Nasdaq hits six-year high.” Lately it would be hard to say that the headlines from Wall Street could look much better, so why would you look abroad for investments? Well, the numbers tell the story. Over time, stock markets outside of the U.S. have done quite well and, in some instances, have outdistanced results here. Witness that, as a rough barometer, for the last five years investors in large blend domestic equity funds have pocketed an average annualized return of 12%, while investors in international large blend funds have enjoyed returns of 18%.

Whatever your outlook on the U.S. market, Marcus L. Smith, a portfolio manager with MFS Investment Management, says overseas stocks are a good counterbalance to the ups and downs of the domestic market. In fact, even with domestic large blend funds up 8.7% this year, comparable international funds were up 13.3%. There’s also a

compelling reason to look abroad now. Indications are that the U.S. market may continue trailing major overseas exchanges. That’s a concern that the weakness of the dollar in currency markets will only reinforce.

Smith, a 13-year veteran with the Boston-based investment firm, cut his teeth as an analyst both stateside and in London for eight years. He currently works in the firm’s Singapore office, where he manages $17.2 billion in institutional assets and was appointed co-manager of the $1.5 billion USAA International Fund (USIFX), which carries a four-star rating from Morningstar.

In your view, what are the most compelling reasons for individual investors to look abroad?
That’s simple. The rest of the world has been on a roll vis-à-vis markets here. Global holdings have outpaced domestic ones for each of the past seven years. The winning streak could continue for quite a while. For one, the economies of giant Asian markets–India

and China–are booming. Finally, GDP per capita is $4,000 in China and $1,000 in India, figures we know will grow considerably as households in both countries begin to lift consumption in line with increasing incomes.

The second reason to look abroad is valuation, shares trade at a discount as measured by price-to-earnings multiples. The fact is that investors can buy more growth at a bit cheaper price, particularly in Europe at this time.

What are your favorite picks currently?
Our portfolio’s largest holding is Nestlé SA (OTC: NSRGY), the well known Swiss food company. We like it for a couple of reasons: Its business generates a large cash flow that gives it a host of options to pursue. Recently, the company has been using the money to buy back stock, something that’s quite good for shareholders. Nestlé’s revenues are growing in the 6% to 8% range thanks to new innovative products. A good example is Gerber, the baby food line Nestlé bought in the U.S. Gerber’s a great addition because demand is growing and the company is introducing organic and salt-free products to seize upon new trends in the marketplace. Meanwhile, management at Nestlé has been busy restructuring to shrink its overall cost base. We look for the company to grow earnings about 15% annually over the next three or so years.

What’s your next largest holding?
Roche Holding AG (OTC: RHHBY), the Swiss pharmaceutical company, is our second biggest position. One key point with the company is its development of cancer-fighting compounds including Avastin. Avastin was originally a colon cancer product but has also proven effective in treating pancreatic and breast cancers as well. Thanks to products like these, Roche has a good entry point with a lucrative market–cancer specialists–and has not been affected by tougher FDA guidelines as other peer

group members have. Roche is growing earnings at 17% to 20% a year and has a price-to-earnings multiple of 17 by our calculations, which we find attractive alongside its peers. Our thinking is that the company has been unfairly discounted because of the pharmaceutical group’s troubles with cholesterol and pain medicines.

Another drug company is on your list?
We also like GlaxoSmithKline plc (GSK), a British pharmaceutical company. The stock is very inexpensive and the market has overreacted to problems with its diabetes drug Avandia, which suffered from reports that patients taking it may be at higher risk for heart attacks. It’s similar to the way investors punished Merck by overplaying issues with Vioxx in 2004. Glaxo is now trading at 13 times its estimated 2008 earnings. It’s on track to grow revenues 3% to 4% annually and profits 7% to 10% a year over the next 36 months.

Company (Ticker)	Price ( )	52-week price range		2007 Est. EPS	2007P/E Ratio	Comment
		Low	High
GlaxoSmithKline plc (GSK)	$52.64	$51	$60	$3.89	13.6	Investors have oversold shares of the British drug company because of problems with its diabetes drug.
Nestlé SA (NSRGY)	$100.90	$78	$101	$5.46	18.5	Swiss food giant expected to grow earnings at about 15% annually over the next 3 years.
Roche Holding AG (RHHBY)	$90.50	$84	$98	$4.53	20.0	Shares of the Swiss pharmaceutical company have been unfairly punished by problems in the sector.