Benjamin E. Segal's strategy of avoiding large companies may help his Neuberger Berman International Fund post the best performance this year among funds that invest outside the United States.
About 60 percent of the mutual fund's holdings are not part of the Morgan Stanley Capital International Europe, Australasia, Far East Index, a benchmark for managers of U.S. funds that invest in companies based outside the country.
The $560 million fund had 21 percent of its assets in energy shares at the end of June, more than double the industry's weighting in the Morgan Stanley index. Talisman Energy Inc., a Canadian oil and natural-gas producer once part of Europe's BP PLC and not included in the index, is the fund's No. 3 holding.
"We are thinking creatively," Segal, 36, said in an interview from his New York office. "We own stocks that a lot of people don't own, and we are not afraid of not owning big companies" such as BP.
The fund has risen 12.7 percent this year, ranking third among 128 U.S. funds that invest internationally, according to data as of Tuesday tracked by Bloomberg. The Westcore International Frontier Fund is the leader, with a 13.3 percent gain. The No. 2 fund is Rochdale Atlas Portfolio, which has risen 12.9 percent.
During the past three years, the Neuberger fund has returned 25.6 percent a year on average, more than all other funds in its category.
International stocks have outperformed U.S. shares as a slide in the dollar boosts the value of profits in other currencies. The Morgan Stanley index has returned 11 percent a year since the start of 2002, outpacing the 3 percent gain in the Standard & Poor's 500-stock index.
Segal said the rally in international stocks has prompted him to stray even further from the big names in the index to focus on finding smaller, lesser-known companies.
"It's not a tame fund," said Bill Rocco, an analyst at Morningstar Inc., the Chicago-based mutual fund research firm. "It goes its own way."
Segal, who received an MBA from the University of Pennsylvania's Wharton School of Business, spent 18 months as a management consultant with Bain & Co. He quit in 1997 because it took too long for decisions to get made.
He jumped to the fund industry, and in 1998 joined New York-based Neuberger, now owned by Lehman Brothers Holdings Inc., as an associate portfolio manager. Two years later, he was promoted to co-manage the international fund. In 2003, after co-manager Valerie Chang retired, Segal took full responsibility for the fund.
Running a fund "combines the more exciting element of consulting with few frustrations," Segal said. "You can conduct due diligence with a compressed period of time and make a decision soon afterwards."
Since he took control, the fund's assets have grown almost sixfold from $95 million. Investors are depositing about $100 million each quarter. Segal said his team, including four analysts, can accommodate as much as $5 billion.
Segal is optimistic that demand from China and the United States will bolster oil prices, helping sustain earnings for companies such as Talisman and BP. Oil climbed to $66.86 a barrel on Friday and has gained 46 percent from a year ago.
Talisman is a better bet on oil than BP because all of its revenue comes from selling the commodity, Segal said. The Calgary-based company in the past two years has relied on drilling off the coast of Malaysia and in upstate New York to boost output and reserves. Chief executive Jim Buckee pledged to increase per-share output by 5 to 10 percent until at least 2007.
While BP's exploration and production business also gets a lift from rising oil prices, higher input costs hurt its refining business, according to Segal. London-based BP derives more than half of its sales from oil refining and marketing.
"You get much more leverage to oil prices when you focus on exploration," Segal said. "The value you capture is more upstream."
Shares of Talisman have jumped 77 percent this year, compared with the 29 percent gain in BP's stock.
MacDonald, Dettwiler and Associates Ltd., which built the robotic arm of the space shuttle Discovery, is the only stock that Segal added to his top holdings this year. It's not in the Morgan Stanley index. The Richmond, British Columbia-based company is benefiting from growing government efforts in North America and Europe to convert property information from paper documents into digital data, Segal said.
MacDonald Dettwiler's profit, which quadrupled from the time the company went public in 2000 to last year, will grow 21 percent this year, Segal estimated.
The Neuberger fund began buying the stock in February for an average price of $22.39. With 432,000 shares at the end of the June, MacDonald Dettwiler is the fund's No. 6 holding, at 2 percent.
While the stock has climbed 21 percent, to $27.19 since the end of February, Segal expects more gains. The shares are worth $39.13, he said.
MacDonald Dettwiler "dominates the niche market for property information," Segal said. "We always get our antennae up for companies doing something slightly interesting."
Demetrios Pasigos in Princeton contributed to this report.