Putnam international fund taps BASF, Banco Itau, Telus

     By Ciara Linnane
     Last Updated: 12/15/2004 12:01:00 AM

     NEW YORK (CBS.MW) -- Pamela Holding welcomes change.
     The co-manager of the Putnam International Growth and Income fund
(PNGAX) looks for shares of large- and mid-capitalization companies outside
of the U.S. with a catalyst that can bolster earnings and boost performance.

     The manager's stock selection process involves several criteria
including price/earnings ratio and free-cash-flow yield. The goal, she said,
is "to find stocks that are cheap relative to their own history, relative to
their sector and region."

     The fund rose 14.6 percent over the 12 months through Dec. 13, lagging
its peer group's 15.9 percent average gain, according to fund data firm
Lipper. Its three-year annualized 21.4 percent return is on par with its
category average.

     The portfolio is heavily invested in emerging markets, particularly
across Latin America, and has meaningful positions in Taiwan and China. It
also has a strong position in Europe.

     "Even though we're nervous about the currency situation," Holding
said, "we see good opportunities there."

     One of Holdings' favorites is German chemical giant BASF AG (BF),
which Holding compares favorably to U.S. rival Dow Chemical.

     "They should be trading extremely similarly," she said. "Both are
commodity chemical companies." But while Dow's stock trades at about 19.5
times earnings, BASF's P/E is about 15.

     In addition, BASF has fatter margins than Dow. European chemicals have
lagged the pricing shift seen in the United States, placing them in a better
part of the business cycle than their U.S. counterparts.

     BASF is currently renegotiating pricing contracts, a benefit that
should add to earnings over the next several quarters, Holding said.

     "Chemicals still have some pricing power, while other sectors are
really at the top of the cycle," she said. "We think BASF has significant
upside."

     U.S.-listed shares of BASF lost 25 cents on Tuesday to $69.

     The Putnam fund is also drawn to companies that stand to benefit from
improving conditions in emerging markets. Holding is especially bullish on
Brazil, which is enjoying a period of strong economic growth.

     "Brazil has gone from a position of great fiscal weakness to a
surplus," Holding said. "One thing we wanted to play was the impact of that
burgeoning economy on the consumer -- especially relative to the U.S.
consumer."

     The Putnam fund began to build a position in Banco Itau (ITU) last May
and has continued to accumulate shares, even as the price has risen to more
than $72 from $52.91 at the beginning of that month.

     "It's one of the highest-quality banks, with extremely low
loan-to-interest-bearing assets," Holding said. The retail and corporate
bank has seen loan growth of about 30 percent in the past year and is
conservatively provisioned, she added.

     "It's a combination of good growth, high margins, good diversification
and a solid economic backdrop," she said. "It has 30 percent return on
equity but trades at 8.7 times its P/E. Even after the nice run it's had,
its still a core holding."

     U.S. listed shares of Banco Itau ended Tuesday at $71.72, down 18
cents.

     Holding also likes Canada's Telus (TU) as a direct route into North
America's wireless market.

     In May, Telus acquired its major cellular rival, Microcell, a decision
that dramatically improved its outlook, Holding said.

     "The stock had been weak up to that [point], so we started to build a
position," she added. "We were hoping that once the biggest price gouger was
out of the market, pricing would improve -- which is exactly what happened."

     On Tuesday, Telus shares lost 29 cents to $25.81.

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