By Chris Konstantinos, CFA
In our view, international markets are less efficient, creating opportunities for active portfolio management.
We believe a passive approach to international investing may lead to unintended sector concentrations.
A surprising number of the best performing stocks in a given year are based outside of the US.
One of the great joys of being a part of a firm like RiverFront is access to some of the most thoughtful, intelligent, and grounded minds in the asset management space. This comes not only within our own walls, but also with other firms who we’ve been fortunate enough to count as partners.
One such partner is Boulder, CO-based Chautauqua Capital Management, a division of Robert W. Baird. Chautauqua is a boutique international and global asset manager which has managed relatively concentrated, high-conviction international stock portfolios since 2006, and shares RiverFront’s cultural emphasis on humility and intellectual curiosity. We recently had an opportunity to pick the brain of David Lubchenco, a partner at Chautauqua, on the always-entertaining, always-controversial topic of international investing. Chautauqua’s investment views are the product of a team-based approach, and herein David neatly summarizes the team’s collective sentiments.
Chris Konstantinos: We hear all the time in the United States that active US managers consistently underperform their benchmark, and that outperforming the S&P 500 is difficult to do consistently. Is this dynamic different internationally?
David Lubchenco: Statistically, over the past 5, 10, and 15 years, most US managers have underperformed their benchmark. However, the majority of international managers have had higher success rates outperforming their benchmark – as illustrated below (see chart).
Past performance is no guarantee of future results. Shown for illustrative purposes. Not indicative of RiverFront portfolio performance. Index definitions are available in the disclosures.
We believe this is because investing internationally is different. International markets are less efficient, their index composition differs from the US indexes and the composition of public companies within international indices are different, providing unique opportunities for active managers of international portfolios. For example, in many countries, the local stock market indices are dominated by current or former state-owned enterprises (SOEs) which are often uncompetitive and have serious corporate governance issues.
I have to say I concur. David, talk to us a little bit about the sector composition differences you see between US indexes and abroad? Do you think this helps contribute to the greater success money managers have had outperforming benchmarks overseas?
The sector composition differences between the US indexes and abroad are one of the main contributing reasons why we believe an active approach to international investing is critical. As you can see below, the MSCI ACWI ex-US international index is significantly overweight traditional “value” sectors facing long-term structural and macroeconomic headwinds, while it is underweight “growth” sectors relative to the S&P 500. The MSCI ACWI ex-US index’s underweight to information technology, health care, and communication services accounts for a large portion of the index’s underperformance versus the S&P 500 index over the past several years.
Source: MSCI, Standard & Poor’s. Sector exposure (%) provided as of 08.31.2021. Shown for illustrative purposes. Not indicative of RiverFront portfolio performance. Index definitions are available in the disclosures.
Drilling down and looking at relative valuations within the value and growth sectors yields some interesting observations. First, international growth is cheaper than US growth on both an absolute PE and a growth-adjusted basis. Second, international and US value sectors are cheaper than their growth counterparts on PE, but more expensive on a growth-adjusted basis.
Source: Bloomberg. Sector index weights are as of 08.31.2021 and index pricing and consensus EPS estimates are as of 10.04.2021. Past performance is no guarantee of future results. Shown for illustrative purposes. Not indicative of RiverFront portfolio performance. Index definitions are available in the disclosures.
Can you talk to what the opportunity set for investing looks like outside of the US? I find that there’s some general misconceptions here among investors who feel that the US has an ironclad monopoly on great companies.
One important reason to broaden your portfolio and to invest internationally is the expanded opportunity set that worldwide investing offers. Approximately 96% of the world’s population, 85% of the world’s economic activity (75% based on nominal GDP), and 66% of public companies with market capitalizations greater than $5 billion are outside the US – yet most US investors are under-invested in international companies. On top of that, if you look at the top performing 50 stocks […]
By Chris Konstantinos, CFA