International Equity Strategy
International Equity Strategy

International Equity Strategy

 
 
 
Summary

The Morgan Stanley International Equity Strategy invests in a diversified portfolio of companies that are primarily domiciled outside of the U.S. The portfolio consists of a combination of high-quality companies characterized by high returns on capital and strong free cash flow generation, and more cyclical companies with improving or mispriced fundamentals, the mix of which varies over time based on valuation and company prospects. The Strategy seeks to provide superior returns over the long term by providing attractive absolute returns in rising markets while offering a relative measure of downside protection in challenging markets.

 
 
Investment Approach
Philosophy

The International Equity Strategy looks to generate superior long-term performance by investing in two types of companies, attractively priced High-Quality Compounders, companies that have the ability to generate sustainably high returns on capital employed (ROOCE), and Value Opportunities which are more cyclical companies with reasonable and/or improving fundamentals that are trading at a sufficient margin of safety to compensate for their greater risk. The team believes that a portfolio consisting of both types of stocks, with the flexibility to adjust the mix dependent on price and prospects, has the potential to generate attractive long-term returns for investors.

The mix between High-Quality Compounders and Value Opportunities is not a top-down allocation and will vary across the market cycle depending on price and perceived prospects. However, the Strategy has typically maintained an overweight to quality companies given their potential for superior long-term compounding and overall contribution to the Strategy's long-term pattern of asymmetric returns.

The team believes that losing money is worse than missing the chance to make it. The team further believes that benchmarks are inherently risky and does not attempt to manage tracking error. Rather than relative risk, the team's primary concern is absolute risk - the permanent loss of capital. In keeping with the team's emphasis on bottom-up stock selection, risk is assessed at the stock level by evaluating company fundamentals, financials, management, price and what would go wrong. The team uses free cash flows over reported earnings to assess valuation.

 
Differentiators
Patience Is a Virtue

Compounding capital takes time. Markets, however, are obsessed with short-term results. By taking a longer investment view, we attempt to take advantage of any pricing anomalies versus a stock's long-term fair value.

A Sense of Perspective

Trying to beat the market every year is futile. We understand that what matters is capital preservation, particularly in tough years when our clients need performance the most.

A Balance Based on Price and Prospects

Our genuine long-term view and focus on price gives us the flexibility to exploit both high-quality and value opportunities in a time proven process.

A Strong Heritage

A disciplined, fundamental research-based investment philosophy stretching back over 30 years underpins the Strategy.

 
 
 
Investment Process
Bottom-Up Stock Selection Based on Fundamental Research
1
Screening Universe

Assessment of Starting Point and Liquidity
(Free Float > $2Bn)

High-Quality Compounders

  • Have high returns been sustained?
  • Is valuation fair value or better?

Value Opportunities

  • Do price or price movements look interesting?
  • Do returns look reasonable or unusually depressed?
2
Kicking the Tires

Assess Potential Stock Candidate - High-Quality Compounder, Value Opportunity or Value Trap?

  • Will returns on operating capital employed (ROOCE) improve, hold or fade?
  • Attractive market share and distinct competitive advantages?
  • Subject to a higher degree of cyclicality or capital intensity?
  • Assess industry dynamics, company developments, financial strength, material ESG concerns.

Determine Intrinsic Value

3
Portfolio Construction

Security Selection

  • Does new idea offer better risk/reward trade-off?
  • Stock weighting is influenced by absolute level of risk and team’s level of conviction.

Sell Discipline

  • No sale is automatic 
  • A stock is typically reduced or liquidated if:
    • The fair value target has been reached (Value Opportunities) or exceeded (High- Quality Compounders).
    • Regulatory environment/industry deteriorates.
    • The investment case has changed or been proven wrong.
    • Another stock idea is more compelling.
 
Price and Prospects Determine the Balance Between the Two Over Time
 
 
 
 
Investment Team
Head of International Equity Team
26 years industry experience
Managing Director
24 years industry experience
Executive Director
20 years industry experience
Executive Director
20 years industry experience
Executive Director
16 years industry experience
Executive Director
18 years industry experience
Executive Director
10 years industry experience
Executive Director
8 years industry experience
Vice President
11 years industry experience
 
 
 
 

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