International Advantage Strategy
International Advantage Strategy

International Advantage Strategy

 
 
 
Summary

The International Advantage Strategy seeks to invest in high-quality, established companies on an international basis with sustainable competitive advantages, strong free-cash-flow yields and favorable returns on invested capital trends. Market capitalizations are within the range of companies included within the MSCI All Country World ex USA Index.

>80%
Typical active share
30%-50%
Typical number of holdings
20%-50%
Typical annual turnover
 
 
Investment Approach
Philosophy

The International Advantage Strategy seeks to invest in established companies on an international basis with capitalizations within the range of companies included in the MSCI All Country World ex USA Index. To help achieve this objective, the investment team seeks companies with strong brand recognition, sustainable competitive advantages, strong current free-cash-flow yield, favorable return on invested capital trends, and focuses on long-term growth rather than short-term events, with stock selection informed by rigorous fundamental analysis.

 

 
Differentiators
Culture

The Strategy benefits from a team culture that fosters creativity, a willingness to think differently, and continued evolution and innovation.

Large-cap approach

The Strategy applies a large-cap approach seeking investments in quality assets at a discount.

High-conviction ideas

The Strategy offers the investment team's high conviction ideas wherein active share is generally > 80% and the top ten holdings are frequently as much as 50% of a given portfolio.

 
 
 
Investment Process
1
Idea Generation

The investment team generates investment ideas through an ongoing set of activities: (i) involvement in contact networks across industries and in the investment management business; (ii) its reading network; (iii) its focus on Return on Invested Capital and free-cash-flow yield; (iv) team discussions; (v) the identification of patterns; (iv) conventional-valuation and coverage biases, among others; and (vii) continual research on current company holdings.

2
Bottom-up analysis and valuation

The team narrows its idea generation by seeking stocks that reside in the intersection between its views of a company's business quality, growth quality and risk/reward characteristics.  Valuation focuses on free-cash flow yield three to five years in the future.

3
Disruptive change research

To complement its in-depth, bottom-up research, the team's disruptive change researcher investigates big ideas and emerging themes that typically may have far-reaching consequences, such as nanotech, infrastructure and the global water shortage.

4
Portfolio construction and implementation

The team's portfolios are actively managed and built to maximize expected value.  Company weightings are primarily determined by the quality of the idea and the team's conviction.  Each member of the investment team helps drive stock-picking, with at least two of the three most senior members typically involved in final construction decisions.  The team expects its portfolios to be well-diversified, and reviews factor analysis on a monthly basis in order to ensure the portfolio's risk is more idiosyncratic than systematic.  The team anticipates holding between 30 and 50 securities.

 
 
Investor
Managing Director
16 years industry experience
 
 
Insights
Investment Insight
Fishing for Stocks in China
Jun 09, 2017
Our location in Hong Kong gives us a unique perspective on the risks and opportunities of investing in China, a market we believe is ripe with opportunity for bottom-up stock picking, particularly in the consumer, internet, healthcare and education industries.
 
 
 
 

RISK CONSIDERATIONS

Diversification does not protect you against a loss in a particular market; however it allows you to spread that risk across various asset classes.

There is no assurance that a Portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the Portfolio will decline and that the value of Portfolio shares may therefore be less than what you paid for them. Accordingly, you can lose money investing in this Portfolio. Please be aware that this Portfolio may be subject to certain additional risks. In general, equities securities’ values also fluctuate in response to activities specific to a company. Investments in foreign markets entail special risks such as currency, political, economic, market and liquidity risks. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed countries. Privately placed and restricted securities may be subject to resale restrictions as well as a lack of publicly available information, which will increase their illiquidity and could adversely affect the ability to value and sell them (liquidity risk).

 

This communication is only intended for and will be only distributed to persons resident in jurisdictions where such distribution or availability would not be contrary to local laws or regulations.

There is no guarantee that any investment strategy will work under all market conditions, and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. Past performance is no guarantee of future results.

A separately managed account may not be suitable for all investors. Separate accounts managed according to the Strategy include a number of securities and will not necessarily track the performance of any index. Please consider the investment objectives, risks and fees of the Strategy carefully before investing. A minimum asset level is required. For important information about the investment manager, please refer to Form ADV Part 2.

Any views and opinions provided are those of the portfolio management team and are subject to change at any time due to market or economic conditions and may not necessarily come to pass. Furthermore, the views will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring. The views expressed do not reflect the opinions of all portfolio managers at Morgan Stanley Investment Management (MSIM) or the views of the firm as a whole, and may not be reflected in all the strategies and products that the Firm offers.

All information provided has been prepared solely for information purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The information herein has not been based on a consideration of any individual investor circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To that end, investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.

DEFINITIONS

Active share is a measure of the percentage of stock holdings in a manager’s portfolio that differs from the benchmark index (based on holdings and weight of holdings). Active share scores range from 0% - 100%. A score of 100% means you are completely different from the benchmark. Free-cash-flow yield is a financial ratio that measures a company’s operating free-cash-flow minus its capital expenditures per share and dividing by its price per share. Free-cash-flow yield ratio is calculated by using the underlying securities of the portfolio. Return on invested capital (ROIC) is a calculation that represents the rate of return a company makes on the cash it invests in its business. Tracking error is the standard deviation of the difference between the portfolio and the benchmark returns. 

OTHER CONSIDERATIONS

The indexes are unmanaged and do not include any expenses, fees or sales charges. It is not possible to invest directly in an index. Any index referred to herein is the intellectual property (including registered trademarks) of the applicable licensor. Any product based on an index is in no way sponsored, endorsed, sold or promoted by the applicable licensor and it shall not have any liability with respect thereto.

The MSCI All Country World Ex-USA Index is a free float-adjusted market capitalization weighted index designed to measure the equity market performance of developed and emerging markets, excluding the U.S. The term "free float" represents the portion of shares outstanding that are deemed to be available for purchase in the public equity markets by investors. The performance of the Index is listed in U.S. dollars and assumes reinvestment of net dividends.

The information presented represents how the portfolio management team generally implements its investment process under normal market conditions.

Weights and holdings and tracking error provided are a typical range, not a maximum number. The portfolio may exceed this from time to time due to market conditions and outstanding trades.

Morgan Stanley Investment Management is the asset management division of Morgan Stanley.

 

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