International Resilience Strategy

International Resilience Strategy

International Resilience Strategy

 
 
Summary

The Morgan Stanley International Resilience Strategy is a concentrated portfolio of high quality, predominantly non-U.S. companies, featuring hard-to-replicate intangible assets including brands, networks and licences. The investment team uses bottom-up fundamental analysis to invest in high quality companies at reasonable valuations that can sustain their high returns on operating capital over the long term. Analysis of financially material ESG risks and opportunities and active, portfolio manager-led engagement are core parts of the investment process. The strategy seeks to generate attractive long-term returns with reduced downside participation in challenging markets.

 
 
Investment Approach
Philosophy

The investment team believes that companies that demonstrate resilience—businesses that can adapt, innovate and grow while safeguarding their people, existing assets and brand equity—should be better positioned to compound shareholder wealth over the long term. In International Resilience, the team only invests in compounders: high quality companies with sustainably high returns on operating capital and growth potential. Investing in compounders requires a long-term approach and a focus on minimising the risk of permanent loss of capital rather than chasing upside.

 
Differentiators
A portfolio of high quality compounders

A concentrated portfolio of companies selected by an investment team with a proven track record in identifying well-managed high quality businesses with resilient earnings. These include IT companies offering must-have software and services, life sciences and health care equipment firms providing indispensable products, and world-renowned consumer brand franchises. The team also finds capital light, high return businesses in more niche industries, such as professional services in industrials and payments in financials.

Managing the risks that matter

Preserving capital is key to the ability to compound money over time. With this focus on minimising the risk of permanent loss of capital rather than chasing upside, the team expects International Resilience to exhibit an asymmetric performance profile over time – delivering attractive long-term returns and reduced downside participation during challenging market environments, a hallmark of the team’s longstanding global compounder strategies.

A long-standing history of active investing

With over 25 years investing in quality companies, the experienced and well-resourced International Equity team uses their time-tested investment process and stock-selection criteria to manage the International Resilience strategy.

 
 
 
Investment Process
How Quality Works–the Power of Compounding
 
How We Identify Compounders
1
Identify High Return Companies
  • High and unlevered ROOCE
  • High gross margins (pricing power)
  • Capital-light business models driving FCF generation
  • Strong balance sheet
2
Make Sure Returns are Sustainable
  • Ability to remain relevant through powerful intangible assets such as brands, sustaining high barriers to entry
  • Returns sustainable against material threats, including Environmental or Social factors
  • Dominant market shares protecting against new entrants
  • Stable sales – often repeat business driving recurring revenues
  • Steady organic growth and geographic spread
3
Confirm management's commitment to sustaining returns
  • Focus on return on capital rather than sales or EPS growth
  • Capital discipline
  • Commitment to innovation and investment in franchises
  • Review management incentives
  • Sound Governance structure
  • Engagement on material issues or opportunities where relevant,including ESG factors
4
Valuation
  • A focus on free cash flow, not accounting numbers
  • FCF yield, DCF, EV/NOPAT
 
 
 
 
Investment Team  
William Lock
Head of International Equity Team
32 years industry experience
Bruno Paulson
Managing Director
30 years industry experience
Nic Sochovsky
Managing Director
26 years industry experience
Marcus Watson
Managing Director
16 years industry experience
Alex Gabriele
Managing Director
15 years industry experience
Richard Perrott
Executive Director
18 years industry experience
Isabelle Mast
Executive Director
19 years industry experience
Anton Kryachok
Executive Director
14 years industry experience
Marte Borhaug
Head of ESG
14 years industry experience
Vladimir Demine
Head of ESG Research
23 years industry experience
 

Team members may be subject to change at any time without notice. The investment team currently has 15 members; information on additional team members can be found on MSIM.com.

 
 
 
 
 

RISK CONSIDERATIONS

There is no assurance that a Portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the Portfolio will decline and that the value of Portfolio shares may therefore be less than what you paid for them. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events. Accordingly, you can lose money investing in this Portfolio. Please be aware that this Portfolio may be subject to certain additional risks.  Changes in the worldwide economy, consumer spending, competition, demographics and consumer preferences, government regulation and economic conditions may adversely affect global franchise companies and may negatively impact the strategy to a greater extent than if the strategy's assets were invested in a wider variety of companies. ESG strategies that incorporate impact investing and/or Environmental, Social and Governance (ESG) factors could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. As a result, there is no assurance ESG strategies could result in more favorable investment performance. In general, equities securities’ values also fluctuate in response to activities specific to a company. Investments in foreign markets entail 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. Stocks of small- and medium capitalization companies entail special risks, such as limited product lines, markets and financial resources, and greater market volatility than securities of larger, more established companies. Nondiversified portfolios often invest in a more limited number of issuers. As such, changes in the financial condition or market value of a single issuer may cause greater volatility. Derivative instruments may disproportionately increase losses and have a significant impact on performance. They also may be subject to counterparty, liquidity, valuation, correlation and market risks. Illiquid securities may 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 appropriate 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 provided has been prepared solely for information purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. 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. OTHER CONSIDERATIONS

The MSCI All Country World Ex-U.S. Index is a free float-adjusted market capitalization weighted index designed to measure the equity market performance of developed and emerging markets, excluding the U.S. 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 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.

 

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