People have been spending much more time at home these days. For investors, however, we believe looking for long-term opportunities outside one’s home market is more important than ever. Many investors—whether consciously or subconsciously—tie a country’s economic growth to growth of companies based there. And in light of today’s greater economic uncertainties, that bias may prove detrimental. Certainly, there are plenty of companies that are growing their profits, sales and cash flow much faster than the gross domestic product growth rate in the country in which they are based. And many of these international companies are truly global in nature and not tied to the fundamentals of their domestic economy.
We have found opportunities in technology, e-commerce, semiconductor and health care across the globe, and also in companies that are leaders in niche industries. For example, one of the leading suppliers of cathode materials for rechargeable batteries used in hybrid and electric cars is a Belgian company. One of the leading global suppliers of implants for people with severe and profound hearing loss is Australian.
When people think about e-commerce, they tend to think about companies like Amazon or some of the Chinese titans, but e-commerce is growing rapidly around the world. We see good potential in Latin America, where e-commerce is growing off a much lower base than the United States or China and therefore offering compelling investment opportunities.
COVID-19 Pandemic and Recovery
From an international investment lens, what we think has become more important during the COVID-19 pandemic is understanding where companies operate, and less so where they are headquartered. Different regions of the world are recovering from the COVID-19 pandemic at different paces. Many Asian countries have had experience dealing with past epidemics, including SARS, and they have thus tended to recover more quickly than the rest of the world. And at this point, Europe looks to be recovering faster than many parts of the United States.
The extent that Asia and Europe recover more quickly than the United States may shift the focus away from companies with a strong presence in the United States to those with businesses in regions that are recovering more rapidly. We would expect that companies focused on these regions to generate more revenue than those whose markets are constrained by lockdowns.
With the pandemic causing this greater disparity in growth rates in the near term, we believe it is an opportune time for US investors to look international for opportunities that may have gone overlooked previously. While the US market has underpinned global equity market returns in recent years and still accounts for roughly 40% of the total global stock market capitalization, more than half the potential investment opportunities lie elsewhere.
We certainly didn’t go into 2020 expecting a global pandemic, but from an investment standpoint, our portfolio has been supported by the characteristics we look for in our holdings, including free cash flow, balance sheet strength, a seasoned management team, a strong business model and leading competitive position. Quite a few non-US companies can emerge from the current crisis in much stronger positions. Some have already accessed the capital markets to raise money to either expand their addressable market or buy out weaker competitors to better position themselves for the opportunities they see arising over the next few years.
A Focus on Mid- and Large-Capitalization (Cap) Stocks
Diligent fundamental research is crucial in uncovering potential opportunities, particularly given the current public health and economic uncertainties. We tend to invest in international companies with a clear focus that operate only a handful of business lines. That allows us to gain better visibility into the underlying business, including where they derive their sales and earnings, as compared to large conglomerates. Often, this approach leads us down the market-cap spectrum to mid-cap companies that tend to be a bit earlier in their growth cycles. These companies have proven businesses with years of growth ahead of them, in our view. We believe the quality of the business model, financial strength and management are more important than domicile or market capitalization in driving returns over the longer term.
We also strive to limit the overlap of underlying economic drivers to manage risk, so our portfolio does not have too much exposure to companies with a common revenue or expense driver. For example, the travel and leisure industry has been hit hard and will take longer to recover than e-commerce, gaming or online education, which have been booming during the pandemic.
In sum, our process is focused on identifying great growth companies that have staying power regardless of the economic environment and put them together in a portfolio that is concentrated, yet at the same time, diversified. Finding these stocks may mean leaving the home market for lesser-known international opportunities.
What Are the Risks?
All investments involve risks, including possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments; investments in emerging markets involve heightened risks related to the same factors. To the extent a strategy focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments.
Diversification does not guarantee profit or protect against the risk of loss.
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