International Equity Strategy
International Equity Strategy

International Equity Strategy

 
 
 
Summary

The 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 reasonable and/or improving 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 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
1
A Disciplined Bottom-Up Approach

The team follows a distinct investment process based on fundamental analysis and bottom-up stock selection, with sector, industry and stock weights driven by the team’s assessment of each stock’s quality and valuation characteristics.

2
Screening Universe

Approximately 1,000 stocks make up the Strategy’s investment universe. Stocks are screened based on financial metrics that the team believes are associated with High-Quality Compounders and Value Opportunities. The team looks closely at liquidity, returns on capital and valuations, filtering down the universe for investment candidates worthy of further fundamental analysis. Have high returns on capital been sustained, and is the company’s valuation fair value or better? That might indicate a potential High-Quality Compounder. A company whose valuation or price movements look interesting, or where returns look reasonable or unusually depressed may represent a Value Opportunity.

3
Kicking the Tyres

Once the initial universe has been reduced, the team conducts its own fundamental research and aims to meet company management, further assessing each potential stock candidate to establish whether it represents a High-Quality Compounder, a Value Opportunity or a Value Trap. The team seeks to understand the following:

  • What is the company’s franchise, and what are its growth prospects?
  • Will ROOCE improve, hold or fade?
  • Does the business have attractive market share and distinct competitive advantages?
  • Is the business subject to a higher degree of cyclicality or capital intensity?
  • What is management’s response to potential threats to the business?
  • What is the financial strength of the business?
  • Are management incentives appropriate?
  • How does management allocate capital?

When determining intrinsic value, the team focus on free cash flow (FCF) rather than accounting numbers.

4
Portfolio Construction

The investment case supporting each stock candidate is then discussed and debated as a team. Should the team decide to invest, the weighting of the stock is subject to the team’s relative conviction in the company, taking into account its overall fundamentals, current valuation and how it impacts the portfolio’s overall quality and upside potential.

The sell discipline will depend on the type of stock – High-Quality Compounders or Value Opportunities. Depending on price and prospects in the portfolio and market, the team may continue to hold High-Quality Compounder stocks at fair value. With Value Opportunities, a stock is typically reduced or sold if it reaches or exceeds its fair value.  Stocks are also reduced or liquidated if there is a material deterioration in the investment case.

 
 
Portfolio Managers
Head of International Equity Team
25 years industry experience
Managing Director
15 years industry experience
Managing Director
25 years industry experience
Executive Director
19 years industry experience
Executive Director
19 years industry experience
Executive Director
15 years industry experience
Executive Director
17 years industry experience
Vice President
9 years industry experience
Vice President
8 years industry experience
Vice President
11 years industry experience
 
 
Insights
Investment Insight
Seeking Sustainability
Nov 30, 2017
William Lock discusses how a strategy that his team manages has incorporated the Buffett philosophy into a long standing, successful global investment strategy.
Investment View
Q&A with Nic Sochovsky
Dec 29, 2015
Nic Sochovsky, a portfolio manager on the International Equity Team, discusses the team’s significant exposure to what they consider high-quality Consumer Staples.
Macro Insight
The Power of Compounders with William Lock
Sep 27, 2017
William Lock explains why he believes a company’s intangible assets are integral to achieving sustainably high returns.
 
 
 
 

RISK CONSIDERATIONS  

Past performance is not a guarantee of future performance. There can be no assurance that the Strategy will achieve its investment objectives. Portfolios are subject to market risk, which is the possibility that the value of the investments and the income from them can go down as well as up and an investor may not get back the amount invested. Accordingly, you can lose money investing in this strategy. Please be aware that this strategy may be subject to certain additional risks. In general, equities securities’ values also fluctuate in response to activities specific to a company. Investments in small- and medium-capitalization companies tend to be more volatile and less liquid than those of larger, more established, companies. Investments in foreign marketsentail 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. Derivative instruments can be illiquid, may disproportionately increase losses and may have a potentially large negative impact on the portfolio’s performance. Illiquid securitiesmay be more difficult to sell and value than publicly traded securities (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, which is not impartial, is provided for informational and educational purposes only and should not be deemed as a recommendation. 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

Return On Operating Capital Employed (ROOCE) is a ratio indicating the efficiency and profitability of a company’s trade working capital. Calculated as: earnings before interest and taxes/property, plant and equipment plus trade working capital (ex-financials and excluding goodwill).

Free cash flow (FCF) is operating cash flows (net income plus amortization and depreciation) minus capital expenditures and dividends.

Tracking error is the amount by which the performance of the portfolio differs from that of the benchmark.

OTHER CONSIDERATIONS

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the international equity market performance of developed markets, excluding the U.S. & Canada. 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 MSCI EAFE Index currently consists of 21 developed market country indices. The performance of the Index is listed in U.S. dollars and assumes reinvestment of net dividends. The index is unmanaged and does 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 information presented represents how the portfolio management team generally implements its investment process under normal market conditions. Investment team members may change from time to time without notice.

The weights, tracking error typical yield duration, and the number of issuers represent typical ranges and are not a maximum number. The portfolio may exceed these from time to time due to market conditions and outstanding trades. 

 

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