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Are Brazil and China the Next Bubble?

Fund manager Charles de Vaulx

A growing consensus holds that the best hope for ending the
recession lies in emerging markets like Latin America and, especially, China.
Fast growing and relatively sound financially, they'll rebound first
and pull the rest of the world along. The market has bought into that scenario,
bidding up emerging-markets stocks to far stronger returns than in the U.S. or
Europe. Cash has cascaded into emerging-markets funds — $4.9 billion
during the first five months of 2009 — which is usually a danger
sign. Emerging-markets funds have a long history of off-the-chart returns
followed by gut-wrenching falls, just at the point that they reach maximum

One pro who currently has no appetite for this hot investment
category is Charles de Vaulx, co-manager of the IVA Worldwide Fund ( href="">IVWAX),
which invests overseas and domestically, and the IVA International Fund ( href="">IVIOX),
which invests only outside the U.S.

Instead, he's keen on that symbol of stagnant growth and
"lost" deflationary decades, Japan. "Here is an
economy that has been doing nothing for close to 20 years," he says. "We
like the idea of finding values in an economy like that." De Vaulx,
whose funds launched October 1, 2008, recently explained why to CBS contributor Jeff Nash.

You’re not invested in high-growth emerging markets like China
and Latin America. Why?

We’re value investors, so we don’t
necessarily chase high-growth stocks. We also don’t like the types of
companies in the Chinese stock market. They require a lot of capital and always
carry the risk of government intervention. Last year, the Chinese government
put caps on gasoline prices, which resulted in PetroChina losing money even as
oil prices hit record highs. And when you’re investing in companies
in Latin America, you have to worry that the company may be run in the
interests of the managers and other insiders, not the shareholders. Quite a few
countries there have also been seduced by populist-type politicians, so you also
have political risk.

But inflows to emerging-markets funds and exchange-traded funds have been
accelerating. What’s the allure?

Stocks in emerging markets became cheap late last year and
early this year. And, in many cases, they had less debt than their peers in the
U.S. and Europe. The bad news is that they’ve already bounced back a
lot. And if the world economy is as slow as we think it will be for the next
three to five years, these kinds of markets — which are largely
manufacturers and commodity producers — will suffer. Exports will be

Are emerging markets the next bubble?

I would not call it a bubble, but one has to be very
disciplined about valuations when investing there.

You have a lot of your funds’ money in cash — 17
percent of assets in Worldwide and 18 percent in International. Are foreign
stocks too expensive?

Values are close but not as appealing as we’d like
them to be, so we’re in a bit of a “wait and see”
on the equity side. We like to have the ammunition to pounce if valuations
become more compelling.

Japan accounts for the largest single-country allocation in both of your funds.

We think Japan has a shot at posting the best equity returns
over the next several years. Last year, the Japanese stock market fell more than
40 percent, so we’re paying very little for companies there with very
strong finances. We’re also finding companies that have lots of cash,
which allows them to maintain dividends, buy back shares, or acquire
competitors. We really like Temp Holdings,
a staffing company. Other favorites are href="">Astellas Pharma, which
recently bought back shares, and Fanuc ( href="">FANUY),
which makes robotics for many U.S. and Japanese electronics and auto

Where else do you see strong returns overseas?

The regions that are likely to bounce back the quickest
should be those with the least household debt. Aside from China, which is
already recovering a bit, that means India, Taiwan, and, hopefully, Japan.

What are a few of your favorite stocks for 2009?

Sodexo ( href="">SDXAY),
a catering company based in France. Also, Nestle ( href="">NSRGY),
the Swiss-based food company, and Thai Beverage ( href="">TBVPF),
the premier liquor and beer company in Thailand. The political situation in
Thailand is unnerving but not dangerous. Secom ( href="">SOMLY),
Japan’s largest security company, is also a favorite.

You currently have 8 percent in gold bullion. What’s the case for
owning gold?

We view it as an insurance policy against deflation.
Conversely, if inflation comes back because the government has thrown too much
money at the crisis, that could also be positive for gold. Longer term, we believe
the dollar will become a weaker currency, yet there are very few possible
candidates for replacing the dollar. So people will consider gold as the
ultimate hedge.

Why not own gold stocks?

Gold was up 5 percent last year, while gold-mining stocks
were down 35 percent. Yet that does not make gold stocks cheap enough.

The Worldwide Fund has 32 percent in fixed income. Do you see the best
international returns for 2009 coming from bonds?

Yes. Fixed income has provided good returns so far this
year, and high-yield bonds can capture equity-like returns. In the long run,
equities typically provide returns of 8 or 9 percent. So when bonds are able to
deliver those kinds of returns, with a small risk of default, we are intrigued.

International investing didn’t offer U.S. investors much
protection last year when most foreign markets were hit harder than ours. What
lesson can investors learn from this?

The U.S. is the bellwether market, so when it falls a lot,
you can expect that foreign markets will, too. But the foreign markets with
less household indebtedness should be able to stop moving in lockstep with the
U.S. markets.

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