While Americans continue their love affair with foreign cars, wines and watches, they remain cool to foreign stocks even as the reasons for investing in them grow stronger.
That, at least, was the frustrated argument made by David Antonelli, chief investment officer for MFS Investment Management’s non-U.S. and global equity investments, and other speakers at the Morningstar Investment Conference in Chicago last week.
Speaking on a panel entitled “Is the World Flat?” Antonelli said: “Americans tend to be incredibly insular, yet half the world’s capital is outside the U.S.” Indeed, recently published research from Greenwich Associates shows that only 5 percent of 401(k) assets are invested overseas.
Antonelli said though that there isn’t a great difference between the U.S. and foreign markets, even the emerging ones, making the overseas markets a lot more inviting. “Everything is being integrated and brought into the mainstream where previously certain countries were disadvantaged due to Communism and Socialism,” he said. “There’s a lot of capital and talent in places like India, Eastern Europe and Asia.” Reforms in currency, interest rates and overall structural changes have made many of these emerging markets better places to invest.”
More sophisticated technology has also made it easier to exchange information between countries on opposite sides of the globe. “Technology and telecommunications are conspiring to break down geographic boundaries,” Antonelli said. Robert Lyon, manager of the $1.1 billion Icap Select Equity Large-Cap Value Fund, agreed: “The Internet has made it easier to read analyst reports from Japan in English without necessarily having offices over there.”
Diana Strandberg, a manager of the $21 billion Dodge & Cox International Stock Fund, argued that communicating with overseas firms to see how they’re positioning themselves is an integral part of the research process. Analysts at Dodge & Cox, she said, talk to foreign companies, their suppliers and their rivals as part of their evaluation.
Antonelli agreed. “It’s about thinking about them as franchises rather than emerging markets,” he said. For example, paper companies in Latin America have a structural advantage because trees grow faster there, he noted.
Strandberg cautioned that it can often be tricky to understand the subtle cultural differences of doing business overseas. To illustrate her point, she shared an anecdote about Japan’s Mount Sunshine, maker of Panasonic equipment, which sounded “promoting social harmony” as its mantra. After initially being turned off by this during meetings with the firm, because she was looking for a good business to invest in as opposed to a socially responsible company, it was later revealed that promoting social harmony was really a euphemism for delivering high profits. The story drew laughter from attendees.
What it comes down to, panelists agreed, is doing your homework, which is harder to do in some places than others. Lyon, who holds only large-cap stocks in his portfolio, noted that large-cap companies in Europe, Japan, Hong Kong and Singapore are pretty transparent when it comes to their balance sheets. “We can get it done from Chicago,” he said.
The other panelists, who were not confined to large-cap stocks, placed more emphasis on having analysts deployed overseas. “We think it’s incredibly important to have boots on the ground in local markets, particularly small- and mid-cap companies,” Antonelli said. Small companies overseas that have no analyst coverage offer excellent opportunities to go in to talk with management, whereas with the bigger firms it is more difficult to gain access, he added. Despite his vested interest in small-cap companies, he said that right now “large-cap is the place with better valuations.”
At the end of the day, Strandberg said, it’s about getting quality companies for cheap. “Valuation is the ballast, the beacon when deciding to be more or less aggressive.” For advisors, now might be the right time to do a little more globetrotting for their clients. In fact, that sentiment is already translating into higher fund sales. International and global mutual funds took in more money than their peers in May, with a net $10.1 billion of inflows, according to Financial Research Corp.
