$4 billion fund manager puts 3 top stocks in focus

U.S. stocks have outperformed their faraway places brethren for years. So now may okay be a fine time to have self belief moving into foreign markets.

One expert who favors that idea is Julian McManus, co-manager of Janus Henderson Far away places Fund (JAOSX) , a mutual fund with $3.6 billion in assets. Janus Henderson as an entire had $361 billion of assets lower than management as of June 30.

The Far away places Fund posted returns of 23% for the 300 and sixty five days ended Sept. 26, 5% for 3 years, eleven% for five years and 5% for 10 years.

For an analogous time frames ended June 30, the fund beat the MSCI All Us of a World ex-USA Index in each.

We recently chatted with McManus about his investment philosophy and stock picks as portion of our Expert Interview series.

He stressed the diversification that foreign stocks provide from U.S. equities. Foreign stocks so that it will provide above-market returns at lower than-market risks are reachable, he said.

McManus likes some stocks inside of the defense, semiconductor and banking industries. Here’s what he had to say.

Janus Henderson Far away places Fund investment philosophy

TheStreet.com: What's your investment philosophy?

McManus: It centers on owning companies where free-cash-flow growth is undervalued by the market, and there’s no persistent style bias. This approach defies systematization. We isolate stock selection, now now not risk factors, as the primary driver of alpha [excess return above benchmarks].

TheStreet.com: What's the attraction of foreign stocks?

McManus: They give diversification from U.S.-specific risks — the commercial real estate refinancing cliff, as an instance. As well they offer exposure to uniquely advantaged businesses, a lot of which are trading at very nice looking levels.

These stocks can drive above-market returns at lower than-market risk.

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TheStreet.com: We all know you're bottom-up investors, but are there any geographies, industries or market topics that you simply like?

McManus: We currently in finding nice looking opportunities across the globe, from banks in India and Japan, to companies in numerous levels of the semiconductor supply chain.

Defense is likewise an industry with improving fundamentals and prospects for growth. Yet it still trades at low valuations. That reflects the post-Cold-War peace dividend of the past versus the upper growth, higher [profit] margin future.

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The Boulevard.com: Are there any areas you recoil from?

We tend to attract back from areas where governance risks can mean permanent impairment of capital. This implies certain emerging markets, which face economic and political problems.

We never invested in Russia. Argentina, Mexico and Brazil can even fall into this bucket depending on the political regime of the day.

We also will now now not put money into tobacco stocks, given the adverse health consequences of tobacco consumption.

Related: $7 billion fund manager chooses Amazon and other growth stocks

McManus' stock picks

TheStreet.com: Are you in a position to discuss three of your favorite stocks?

McManus:

1. Taiwan Semiconductor (TSM) , the world’s largest and most important logic semiconductor foundry. It’s liable for making the cutting-edge chips that drive the companies of household names like Nvidia, Apple, Amazon Web Services and Google.

Scale and process technology advantages have reached a tipping point, such that Intel and Samsung can’t sustain, and are likely only to fall further on the back of TSMC.

That suggests TSMC’s growth rates will reflect those of Apple, Nvidia and other high-performance computing companies inside of the long-term. And TSMC’s margins are expected to upward thrust, as its pricing power increases.

All it is underappreciated by the market, which prices TSMC at 16 times forward earnings, when put next with 30 for Apple and 40 for Nvidia.

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2. BAE Systems (BAESY) , [the largest defense contractor in Europe, based in the U.K.] It’s also attractively valued because [the stock price is still influenced] by the peace dividend following the cold war. That translated to little to no growth for defense budgets outside of the U.S.

But now there have been geopolitical shifts, reminiscent of the U.S. Defense Department pivoting to the Pacific, Russia invading Ukraine, and conflict inside of the Middle East. So the worldwide urgency for defense spending is rising sharply, specifically outside the U.S.

On the choice hand, resulting from long-term underspending by these countries on their military readiness, there's a significant catchup that should occur. BAE Systems is one company which has positioned itself well for this change, investing inside of the platforms so one would per chance be most important.

In spite of this change, the equity market has only just begun to rerate BAE, and we'll likely see a few years of above average growth at rising margins.

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3. HDFC Bank (HDB) , probably some of essentially the most categorical-managed banks in India. The long-term outlook for growth in Indian banking is powerful. Both annual return on equity and lending growth are susceptible to continue inside of the high kids [percentage points].

On the choice hand, HDFC is inside of the midst of merging with its large subsidiary, housing lender HDFC Corp. Both are very good businesses of their very own right. But sentiment has cooled on the stock, as quarterly earnings have been less smooth than inside of the past.

Investors with shorter time horizons have stepped out of the stock, leaving it at an undemanding multiple of 18 times earnings. For an organization which has historically grown its earnings 15% to twenty% every year, that’s nice looking.

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