International Equity Strategy

International Equity Strategy

International Equity Strategy


The Morgan Stanley International Equity Strategy invests in a diversified portfolio of high quality compounders and value opportunities, primarily in developed markets outside the US. The compounders are characterized by high returns on operating capital employed and strong free cash flow. The value opportunities tend to be more cyclical, with improving or mispriced fundamentals. The overall mix between compounders and value opportunities varies as valuations and prospects change. The Strategy seeks to provide superior returns over the long term by providing attractive absolute returns in rising markets and helping to reduce downside participation in challenging markets.

Investment Approach

The International Equity Strategy looks to generate attractive 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 operating 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 valuation 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 valuation and perceived prospects. However, the Strategy has typically maintained an overweight to quality companies given their potential for 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 could go wrong. The team uses free cash flows over reported earnings to assess valuation.

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
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?
Kicking the Tires

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

  • Engine of returns and profitability
  • Direction of returns
  • Market shares and distinct competitive advantages
  • Degree of cyclicality and capital intensity
  • Financial strength

Threats & opportunities for sustainable returns

  • Industry dynamics
  • Company developments
  • Material ESG factors


  • Response to potential threats & opportunities
  • Incentives
  • Capital Allocation
  • A focus on free cash flow (FCF), not accounting numbers
  • FCF yield and other measures such as P/E, ROE, P/B, DCF, EV/NOPAT where relevant
  • Does new idea have a better risk / reward trade-off?
  • Weights influenced by absolute level of risk and team’s level of conviction
  • Compounders tend to have larger positions – lower absolute risk
  • 5% max security weight
  • No country or sector limits
Price and Prospects Determine the Balance Between the Two Over Time








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