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 International Equity strategy, now into its fourth decade, has delivered shareholder returns at an annualised rate of 11.3% since 1986—nearly twice the rate of the MSCI EAFE Index.1
“Long term, it’s all about the compounding”, says Lock. “$100 invested at 11.3% since inception (18/11/2014) will grow to over $2,800 compared to the $660 the MSCI EAFE Index rate of 6.2% 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.
• The fund relies on other parties to fulfill certain services, investments or transactions. If these parties become insolvent, it may expose the fund to financial loss
• There may be an insufficient number of buyers or sellers which may affect the funds ability to buy or sell securities.
• Investment in China A-Shares via Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect programs may also entail additional risks, such as risks linked to the ownership of shares.
• There are increased risks of investing in emerging markets as political, legal and operational systems may be less developed than in developed markets.
• Past performance is not a reliable indicator of future results. Returns may increase or decrease as a result of currency fluctuations. The value of investments and the income from them can go down as well as up and investors may lose all or a substantial portion of his or her investment.
• The value of the investments and the income from them will vary and there can be no assurance that the Fund will achieve its investment objectives.
• Investments may be in a variety of currencies and therefore changes in rates of exchange between currencies may cause the value of investments to decrease or increase. Furthermore, the value of investments may be adversely affected by fluctuations in exchange rates between the investor’s reference currency and the base currency of the investments.