If the world is your oyster, as Peter O’Reilly believes, it’s just a matter of finding pearls buried in the depths.

“I have a big universe to choose from, and the challenge is to delineate that into a manageable size,” says O’Reilly, manager of the $1.9-billion Investors Global Fund and vice president of Dublin-based IG International Investment Management, a unit of Investors Group Inc. of Winnipeg.

In creating a portfolio of about 75 names out of a universe of more than 2,000, O’Reilly regards growth in shareholders’ equity as one of the most important criteria. “When I buy a stock, I’m buying equity in a firm,” he says. “I want to understand how that equity is going to grow. And I want to see what premium or discount I’m paying for that equity.”

If, for example, O’Reilly is buying a company with a 17% return on equity, its stock price should grow by 17% a year, including dividends and share buybacks. “But what’s a reasonable price to pay for that?” he asks. “I take it from a very fundamental principle. If I can’t ascribe a tangible value to what I’m buying, it won’t work. I won’t buy into a theme for its own sake.”

O’Reilly cites China’s growth story as an example. Some inves-tors have bought into the emergence of China as the next big thing. But that’s not what appeals to O’Reilly: “Would you pay 45 times earnings [for a stock] because you think China is going up? There are ways to play these themes, especially when the world is your oyster in a global fund. But would I pay a lot of money for them?”

In O’Reilly’s view, the Chinese stock market is dominated by retail investors who treat it like a casino. As a result, he’s playing it safe and investing in base metals and materials, for example, through names such as BHP Billiton PLC, which will benefit from China’s rapid growth. In a similar vein, rather than buying unproven solar-power firms that are cashing in on high commodity prices, he’s sticking to long-established companies — for example, tractor manufacturer John Deere & Co. whose customers have also benefited from strong commodity prices.

“When you can buy John Deere at 14 times earnings, it gives you more comfort,” he says. “You’re buying something that, should the [commodity] theme die overnight, you won’t discover the emperor has no clothes.”

This conservative approach accounts for the fund’s solid returns. Since O’Reilly became manager of the fund in May 2000, it has flourished. For the 12 months ended Aug. 30, the “C” version of IG Global Fund returned 14.1%, vs the median global equity fund’s return of 10.8%. For the three years ended Aug. 31, the IG fund had an average annual compound return of 12.9%, vs 9% for the median fund. And for the past five years, the fund averaged 8.5%, vs 6.7% for the median fund.

The IG fund has been in the first quartile on a one-, three- and five-year basis. The “C” version of the fund, available only to investors who purchased prior to July 2003, has a four-star Morningstar rating. The “A” (deferred sales charge) and “B” (no-load) versions, available to new investors, both have five-star ratings.

In building the portfolio, O’Reilly keeps an eye on macroeconomic trends, but he spends more time screening global markets to find firms with strong cash flows and high ROE. These indicate where value lies and where opportunities may exist. “That’s not to say I am a pure value investor. If I can find a company that is returning 50% on equity, I am willing to pay a good premium,” he says. “I focus on the fundamentals. I’m not going to buy growth without being cognizant of how much I’m paying for it.”

Conversely, O’Reilly’s screens also show markets he should avoid — such as Japan, which he shuns because the ROEs are too low for his liking. “It’s hard to find a Japanese company at a reasonable price with more than a 6%-7% ROE.”

But O’Reilly likes South Korea, whose companies are proving highly competitive against Japan. Among others, he cites LG Electronics Inc. and Samsung Electronics Ltd., which have taken market share away from Japanese makers of consumer electronics, including cellphones and plasma TVs. A long-term investor who keeps turnover around 30% a year, O’Reilly has owned Samsung for about five years and LG Electronics for four.

@page_break@In initiating an equity position, O’Reilly starts by investing about 1% of his fund’s assets. If the stock falls, he simply buys more. “If I’ve done my homework, I have a better buying opportunity to average down into it,” he says. “If it rises, it will reach a price target and I will prune it.” Over time, the more successful holdings will evolve into the fund’s larger positions.

One such holding is Man Group PLC, the world’s largest quoted hedge fund operator; it has about US$60 billion in assets under management. “It’s the original hedge fund,” O’Reilly says, “not the journeymen who suddenly get into the hedge fund business.”

Man Group is spinning off a New York-based brokerage subsidiary, Man Financial Group. “When Man sells Man Financial off,” O’Reilly says, “the residual hedge fund business will look very undervalued.”

The spinoff will hand back a lot of cash to investors and cause the price/earnings multiple to drop. “This will highlight how cheap it is,” he adds. “It’s been off the radar for a bit. But I’ve been following it for five or six years. It is hugely impressive.”

Man Group has a 29% ROE and its shares recently traded at four times price/book value. Acquired five years ago, at an average price of 160 pence a share, the share price was recently 512p. O’Reilly has no stated target.

Stock selection is one reason the IG fund has outperformed its peers, O’Reilly maintains. Another is the fact that he has overweighted Asia ex-Japan at the expense of Japan, and overweighted Europe and Canada at the expense of the U.S. (The U.S. accounts for about 25% of the fund, about half the MSCI world index weighting.)

As well, he has overweighted energy, materials and diversified financial services. Representative names in these areas include Husky Energy Inc., BHP Billiton Co., Rio Tinto Zinc PLC and Credit Suisse SA.

Conversely, O’Reilly has underweighted laggard sectors — technology, consumer staples and pharmaceuticals.

A 38-year-old native of Dublin, O’Reilly has been in the investment industry since he graduated from University College in 1991 with a masters degree in economics. “It gave me a reasonable grounding in financial markets,” he says. His first job was as a trainee analyst in the fund management division of AIB Investment Management, a unit of Allied Irish Bank. In 1992, O’Reilly was hired by Global Asset Management and helped to set up its Dublin operations.

In 1994, O’Reilly moved to London and joined Royal & Sun-Alliance Asset Management, for which he initially worked as an analyst in the international equities department and eventually became a manager of balanced and international equity funds. As he became more involved in strategy and asset allocation and less in stock-picking, he decided to look elsewhere. In 2000, he had an opportunity to get back into stock-picking at IG and to return home, as well. “It ticked all the boxes,” he says.

And he’s happy to be back. “Stock-picking is the way I can add value,” he says. “You get a different perspective of the world. And if you want to understand economics, you talk to the guys out there doing things.”

As well as running the global fund, O’Reilly also manages the $800.2-million Investors Global Dividend Fund and the $223.1-million Investors Global Bond Fund. He co-manages the $57.8-million Investors Global Financial Services Fund with Tim Johal, who works out of Winnipeg, and the $142.4-million Investors Global Natural Resources Class with Tim Leung (Hong Kong), Christopher Holden (Winnipeg) and Diana Fitzgerald (Dublin). In total, O’Reilly is responsible for about $3 billion in AUM.

O’Reilly believes global economies will remain reasonably robust and that China and India will lead global growth. He also believes high interest rates are a confirmation “that global growth is stronger than anticipated.”

He finds that markets look inexpensive on a P/E basis, but are expensive on a price/book basis. Valuations are “only supported by the fact that ROEs in most regions are at historical highs,” he says. “For equities to continue their [strong] performance, we have to see a continuation of strong ROEs. We will see higher profitability than people have expected — which is probably a good thing for equities.”

O’Reilly gets high marks from Gordon Pape, a fund analyst in Toronto and publisher of the Internet Wealth Builder. Under O’Reilly’s tenure, Pape says, “IG Global Fund has much better global diversification. The significant reduction of exposure to the U.S. dollar and increased exposure to stronger currencies, such as the euro, has certainly helped the total equation.”

Pape recently raised his rating of the fund to $$$, from $$ ($$$$ is the top rating). “I’d be nervous if we head back into a bear market,” he says. “But O’Reilly has certainly shown he can outperform when markets are strong.”

Ranga Chand, fund analyst and president of Chand Carmichael & Co. Ltd. in Ottawa, likewise considers IG Global Fund a “heavy hitter.”

“Although the fund was in negative territory when O’Reilly assumed it in the bear market of 2000-01, it still outperformed the category average and the MSCI world index,” Chand says. “It continued the outperformance during the bull market. O’Reilly has a good track record and delivers good risk-adjusted returns.” IE