Legg Mason Global Asset Management
Michael Testorf is one of the managers of the ClearBridge International Growth Fund
- International fund manager Michael Testorf gave Business Insider tips on how he's constructing a diversified portfolio in a world reshaped by the COVID-19 pandemic.
- Testorf is one of the managers of the ClearBridge International Growth Fund, which Kiplinger ranks as the best international large-cap mutual fund of the last 10 years.
- Testorf says the fund continued to beat its peers in the first quarter when markets melted down. It was already in the process of shifting to a more defensive approach.
- Visit Business Insider's homepage for more stories.
Michael Testorf's fund was one of the world's best for almost the entire length of the now-departed bull market, but he's not dwelling on the past.
Testorf is one of the managers of the ClearBridge International Growth Fund, which Kiplinger ranks as the best international diversified large company fund over the previous decade. In a market that's changed dramatically, Testorf says the fund is still ahead of its peers.
"We had a decent outperformance for the first quarter," he told Business Insider in an exclusive interview. "A little bit more than 5%."
The main reason is that some of the fund's investments had reached their targets, and they'd started to shift their portfolio away from cyclical stocks and toward companies with business models that are more steady and defensive.
He offers two keys to its performance over the decade: An emphasis on quality, and a strict approach to prices.
"Quality means, for us, one being is strong balance sheet, meaning relatively little debt, having a strong business model, and good cash flow generation," he said. "We don't want to overpay for growth because overpaying for growth ... will lead to losses."
The fund's investments typically consist of high-potential "emerging growth" companies, trend-based "structural growth" companies, and steady "secular growth" names.
Thanks to the recent meltdown and some investments that achieved the manager's goals, the International Growth Fund today has more cash than usual - about 4% instead of the typical 1% - and is leaning more on the structural and secular growth companies and de-emphasizing emerging growth.
Testorf told Business Insider about some of his strongest convictions about the portfolio today. Those include three investments - each in a different country and a different sector - that he has the most confidence in, one where he's preparing take advantage of a recent stock slump, and one he had no choice but to sell.
The favorites
Testorf explains that Swiss drugmaker Roche could beat the market during an ugly earnings period.
"I'm a little bit worried about what happens in the quarter one earnings season," he said. "I think the big pharma companies should do relatively well."
At the same time, he says the company has a "very, very strong" pipeline that will help ease its path after some key patent expirations, and the market is underestimating Roche's earnings power. That's part of the reason it's the largest investment in his fund.
His second pick, German tech company TeamViewer, is something of an international answer to Zoom, which has soared in the era of social distancing - but where experts are starting to think the enthusiasm has gone too far.
Testorf breaks down TeamViewer's business into three areas: Videoconferencing, remote help desks, and remote workplace log-ins.
"You remotely log into your work PC. That's what I do now every single day. Also a lot of people use it personally. ... It's freemium model."
He says the company has about 340 million active users, and similar to Zoom, a vast majority are using a free version. But its profits could explode if it starts converting more of those users to paid versions.
"I think that is one where you will not see earnings disappointment," he said. "There's so many new clients particular in Asia ... that it's fair to believe their quarter one numbers will be very strong, and the upcoming quarters should be also very, very strong going forward.
Another company going through big changes because of the pandemic is Arco, a Brazilian educational software company. Testorf says about a million private school students already attended class through its platforms, and more private and public schools are now testing Arco's services as a result of the outbreak and lockdowns.
"Arco just introduced the platform to a lot of other new schools which were not able to provide a virtual class offering," he said. "It could also be a potential COVID-19 winner."
In the meantime he sees the company as a safe investment because of its extensive contracts, its status as an acquirer of rivals in a fragmented industry, and the emphasis parents place on education.
"It's a very defensive name in Latin America," he said.
The opportunity
British pest control company Rentokil has been included in the International Growth fund for years, and Testorf praises its "super high-quality top management" and free cashflow generation.
Because they're rigorous about refusing to overpay for growth, he and his fellow managers recently cut their investment in the company in half because its stock price had climbed to a fair value. Unexpectedly, it's plunged with the rest of the market, and he says he might add to his position again.
"Now, we're in a position where we have upside again, and if that one comes down further, I'm happy to buy that," he said. "We have a clear concept what we want to buy at which kind of price, and that's what we're waiting for."
The exit
Testorf praises HDFC Bank as a good long-term stock, but recently closed his position because there's simply too much uncertainty surrounding the company today.
"It's probably the best quality bank in India, with the best growth, the best management," he said, but "Social distancing is in India almost impossible, and we have no idea what the actual numbers of coronavirus (cases) could be and what the impact could be."
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