International Equity Strategy
International Equity Strategy

International Equity Strategy

 
 
 
Summary

The Morgan Stanley 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 improving or mispriced 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 relative 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
Bottom-Up Stock Selection Based on Fundamental Research
1
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?
2
Kicking the Tires

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

  • Will returns on operating capital employed (ROOCE) improve, hold or fade?
  • Attractive market share and distinct competitive advantages?
  • Subject to a higher degree of cyclicality or capital intensity?
  • Assess industry dynamics, company developments, financial strength, material ESG concerns.

Determine Intrinsic Value

3
Portfolio Construction

Security Selection

  • Does new idea offer better risk/reward trade-off?
  • Stock weighting is influenced by absolute level of risk and team’s level of conviction.

Sell Discipline

  • No sale is automatic 
  • A stock is typically reduced or liquidated if:
    • The fair value target has been reached (Value Opportunities) or exceeded (High- Quality Compounders).
    • Regulatory environment/industry deteriorates.
    • The investment case has changed or been proven wrong.
    • Another stock idea is more compelling.
 
Price and Prospects Determine the Balance Between the Two Over Time
 
 
 
 
Investment Team
William Lock
Head of International Equity Team
27 years industry experience
Bruno Paulson
Managing Director
25 years industry experience
Dirk Hoffmann-Becking
Executive Director
21 years industry experience
Nic Sochovsky
Managing Director
21 years industry experience
Vladimir Demine
Executive Director
17 years industry experience
Nathan Wong
Executive Director
19 years industry experience
Marcus Watson
Executive Director
11 years industry experience
Alex Gabriele
Executive Director
10 years industry experience
Richard Perrott
Vice President
13 years industry experience
 
 
 
 

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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