In fact, on a total return basis, a significant percentage of the top performing stocks during each of the past 10 years were non-US. 56% of the 50 best performers in the MSCI ACWI (All Country World Index) in 2018, 94% for 2017, and 88% for 2016 were located outside the US.1 So while US indexes outperformed, international companies provided competitive returns at the individual stock level. That said, investors needing to mind the international gap in their portfolios may find research-driven, highly skilled active equity managers a smart way to diversify for greater growth potential.2
To gain varying perspectives on capturing attractive opportunities worldwide, two active equity shops with long-term performance credentials share their insight. WCM Investment Management’s Co-CEOs and Portfolio Managers, Paul Black and Kurt Winrich, explain their distinct growth approach that emphasizes mitigating downside risk. Value investor David Herro, Deputy Chairman, Portfolio Manager, and CIO – International Equities at Harris Associates (advisor of The Oakmark Funds), discusses the importance of taking a patient, high-conviction investment approach, especially in noisy markets.
Always look on the bright side of global growth
To be a successful growth investor, WCM’s Paul Black believes you have to be optimistic about the future. “You have to see the long-term potential for the world, and for innovations to continuously lead us forward,” said Black. How do he and his fellow optimists at the Laguna Beach, California-based global growth equity firm define a great growth stock? A strengthening competitive advantage, aligned with a well-defined corporate culture, and supported by global tailwinds are three key elements.
Through in-depth, fundamental proprietary research, WCM focuses on competitive advantages and corporate culture to seek long-term excess returns and mitigate downside risk for their concentrated portfolios. “We focus on the direction of the competitive advantage, as opposed to the size of the competitive advantage, which is what we refer to as moat trajectory,” said Black. They find it to be the most correlated factor to stock returns over the long run.
“For us the question is not ‘Is this a great company with a wide moat?’ The question is 'Can we make the case over the next 10, 15, or 20 years that the moat, or the competitive advantage, is actually getting stronger?'” said Black. If they can’t find that long-term moat trajectory, they believe they have no business owning that company. “Because no matter what valuation work you do on it, it's going to show it to be far too expensive if that moat is deteriorating.”
Competitive advantage and culture drive results
Kurt Winrich stresses the critical factor of culture to WCM’s stock selection process. “What gives us confidence that a company we identify that’s growing its competitive advantage can keep growing it for a long time is culture. It’s the way people are treated that allows them to do their best. And, when they do their best, they help to innovate and grow edges. That’s what keeps companies ahead of their competition – by having great people and letting them do great things,” explained Winrich.
WCM’s culture analysis focuses on finding corporate cultures that foster behaviors beneficial to the company’s competitive edge, that display adaptability in the face of internal and external challenges, and that permeate the organization at all levels. WCM feels so strongly about the correlation between corporate culture and investment returns that it has a dedicated business culture analyst who works closely with business analysts and portfolio managers to evaluate culture within the context of a company’s broader thesis.
Less risky business, more return potential
It’s often assumed that concentrated international or global growth strategies can be quite volatile, especially in difficult market conditions. However, this conventional wisdom has not proved to be accurate for WCM, according to Black. In difficult markets, he and his team have found that avoiding deteriorating moats has enabled them to avoid potential landmines. “Conversely, by favoring companies with growing moats, we hold more companies likely to capitalize on opportunity in tough times,” said Black. What’s more, he believes focusing on companies whose corporate cultures are aligned with their competitive advantages increases the chances that a growing moat will keep growing longer than the market expects, through good times and bad.
Ultimately, when WCM thinks about investments, they think in decades, not quarters. “This is the same approach we have towards the way we run our firm. It’s a much easier proposition to succeed in investing, or business, when you think long term – and there’s a lot less competition because most people don’t think long term. Low turnover wins, we believe,” said Black.
Value of consistent, high-conviction investing
Value-oriented Harris Associates is also a big believer in low turnover and taking a long-term investment view. They feel strongly that superior, long-term results are achieved by investing as owners in quality companies that can be purchased at a significant discount to Harris' estimate of a company's intrinsic value. Since joining the firm 27 years ago, David Herro has adhered to the same consistent, research-driven investment approach to find value opportunities around the world.
Harris’ value-based approach is rooted in what Herro describes as healthy cash flow streams. Quality is also an important metric. “This can be exemplified by the return structure of the business or the capital allocator proficiency. Even the corporate governance and board structure of a company are very important to assessing quality,” said Herro.
Overall, Herro believes the reason why the Harris/Oakmark International approach has been so successful through the years is that they stick to their philosophy. “Even when we are out of favor, we don’t mutate into something we are not,” said Herro. In fact, he believes value investors have to endure periods of short-term underperformance to achieve long-term outperformance.
Market volatility creates buying opportunities
“One of the things that allows bottom-up value investors to make money is to know the difference between the movement of a share price because of some macro event, fad or mania that is going on versus the movement of intrinsic value,” said Herro. Downbeat headlines and what he describes as “political blur” rarely result in long-term value depletion. Any time the market overreacts, he sees it as an opportunity to actively increase exposure to select companies that may have realized a wider discount to intrinsic value. “Yes, negative macro news can weigh on share prices, but this is exactly what provides opportunity for the value investor,” he added.
Where’s the value and growth today?
Protracted political turbulence surrounding Brexit, domestic unrest in France, budget controversy in Italy, and the end of the European Central Bank’s stimulus program have generated pessimism, especially in news headlines. Nonetheless, Herro remains optimistic about select quality companies in the European financials and industrials sectors. “The big picture may look a little uncertain. However, in many cases, companies can still make a profit and the earnings of many companies are doing just fine,” he said. Valuations in these areas remain favorable as well.
For WCM, technology, consumer goods and healthcare companies that meet the managers' strict criteria hold some of the most exciting growth potential for long-term investors. Tailwinds from the rise of disposable incomes in the developing world are one factor Kurt Winrich is closely monitoring. “When they achieve higher incomes, we think the developing world is going to do what we do in the developed world: demand better consumer goods, technology, and healthcare. We are already seeing in China, India, and Indonesia that people are spending more on healthcare,” said Winrich.
Pairing complementary strategies for efficient allocation
Diverging sector allocation illustrates how the distinct growth approach of WCM Investment Management and Harris Associates’ disciplined value-oriented style can be complementary in overall portfolio construction. Their active management process tends to make their sector exposures considerably different from the MSCI ACWI ex US index, as well. Therefore, for investors who find their portfolios lacking international diversification2 – and the greater growth potential that goes along with it – pairing these strategies may be an efficient allocation move.
Overall, these active growth and value equity managers, who are willing to go against the grain and maintain portfolios that are unlike their respective indexes, may complement core portfolio holdings.
2 Diversification does not assure a profit or protect against loss
This material is provided for informational purposes only and should not be construed as investment advice. There can be no assurance that developments will transpire as forecasted. Actual results may vary.
The MSCI ACWI ex US is a free float-adjusted market capitalization index designed to benchmark the performance of various global equity markets. The MSCI ACWI ex US is an unmanaged index of stocks, bonds or mutual funds. It is not possible to invest directly in an index.
The MSCI World ex US Index (Net) is a free float-adjusted, market capitalization-weighted index that is designed to measure international developed market equity performance, excluding the US. The index covers approximately 85% of the free float-adjusted market capitalization in each country. This benchmark calculates reinvested dividends net of withholding taxes. The Lipper International Fund Index measures the equal-weighted performance of the 30 largest international equity funds as defined by Lipper.
These indexes are unmanaged and investors cannot invest directly in these indexes.
Equity securities are volatile and can decline significantly in response to broad market and economic conditions. Growth stocks may be more sensitive to market conditions than other equities, as their prices strongly reflect future expectations. Foreign and emerging market securities may be subject to greater political, economic, environmental, credit, currency and information risks. Foreign securities may be subject to higher volatility than US securities, due to varying degrees of regulation and limited liquidity. These risks are magnified in emerging markets.
All investing involves risk, including the risk of loss. Investment risk exists with equity, fixed-income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.
Natixis Distribution, L.P. is a marketing agent for the Oakmark Funds, a limited purpose broker-dealer and the distributor of various registered investment companies for which advisory services are provided by affiliates of Natixis Investment Managers. Natixis Investment Managers, L.P. and WCM Investment Management are affiliated. For each fund with at least a three-year history,
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