William Lock, who led Morgan Stanley’s International Equity team through the 2008 financial crisis, has invested for over 25 years in overseas markets. His team’s Morgan Stanley Institutional Funds (MSIF) International Equity Portfolio, nearing the end of its third decade, has delivered shareholder returns at an annualised rate of 8.6% since 1989—nearly twice the rate of the MSCI EAFE Index.1
"Long term, it’s all about the compounding", says Lock. "$100 invested at 8.6% annualized over 28 years will grow to just over $1,000, compared to the just over $380 the MSCI EAFE Index rate of 4.8% would have given you. The key is to avoid companies with fading returns and to determine the appropriate margin of safety on a company by company basis. The goal is to deliver attractive absolute portfolio returns in rising markets, a measure of downside protection in challenging markets, and a lower volatility of returns than the MSCI EAFE Index.
A focus on price and prospects Lock continues, "We achieve this by bottom-up stock picking, investing in companies that can broadly be categorized as either Value Opportunities or High Quality Compounders. For Value Opportunity companies, we look for improving returns due to management actions and/or cyclical tailwinds, with a sufficient discount to intrinsic value to compensate for risk. Companies in the High Quality Compounder category can generally sustain their high returns on operating capital by virtue of their powerful intangible assets and pricing power, are run by management teams dedicated to preserving these returns, and can be found at intrinsic value or better. There is no top-down allocation between the two types of companies—we are stock pickers and the proportion of companies in the two categories is determined by the individual price and prospects for each company we invest in, on a bottom-up basis. Our overall investment opportunity is having a longer time horizon than the market and where appropriate, a disagreement with the market on the shape of the cycle or the size of the restructuring opportunity.