Capital Group shares its guiding principles for investing globally at a time when everyone seems tied to the US
Why bother investing outside the US? These are uncertain times of trade war and political turmoil. At first glance, US stocks are outperforming their international counterparts. Why not set your assets down on safe American shores and leave the rest of the world to figure itself out? It’s the obvious thing to do.
Rob Lovelace and David Polak of Capital Group would tell you that obvious is the enemy of smart, long-term investing. Their “Guide to International Investing” makes a comprehensive case for going global. The report shares three key takeaways for advisors looking to stay ahead of the curve.
1, Focus on Companies, not Indexes
International markets get a bad rap from their indexes. Polak and Lovelace think that proclivity towards “old economy” companies on those international indexes, and the US love for fast-growth tech stocks, has skewed the picture. The top-50 stocks every year are consistently dominated by non-US companies. In 2019 so far 80% of those stocks are based outside the US.
Research into global companies is the key to this strategy. Looking closely at the top-10 European companies, for example, will show their revenue streams coming from all over the world. Just because their headquarters might be in Paris or Rotterdam, it doesn’t mean these companies are tied to the fate of the European market.
A company focus is especially important when you’re investing in emerging markets. In 1992, Empirical Research Partners found only 36% of a company’s return could be explained by the company itself. Today, 64% of performance is tied to company fundamentals, rather than sectoral or regional factors. It’s up to you to find the winners.
2, Look for deals, they’re everywhere
The fundamentals of a company will drive their long-term returns. In that same long-term, stocks trading at a discount will average higher returns than those selling at a premium. Turns out there’s a raft of fundamentally solid companies trading at a discount. Guess where to find them? Away from the US.
Political and economic issues at home leave non-US companies trading at a discount, even when their performance as a company has nothing to do with the specific concerns keeping stock prices low. Polak and Lovelace point to international companies like Airbus, Total, and Samsung that trade well below their US counterparts in Boeing, ExxonMobil, and Apple. Those are cheaper buys that promise bigger returns long-term.
The devil’s in the details here. You won’t have indexes to guide you, but a smart advisor will flex their research muscles and grab those deals with both hands.
3, Cast a WIDE net
Flexibility might be the watchword of our current moment in investing. There’s a growing uncertainty on the market, and you might have to move quickly to stay ahead of the latest shift. Polak and Lovelace say that a traditional regional approach, divided between the US, developed international markets, and emerging markets, doesn’t offer the same flexibility of investment in global funds.
Global funds will give you a chance to be dynamic, choosing the companies you like from anywhere in the world. Global fund managers, too, have outpaced top-quartile US-only funds. The US might still be the best port of call for passive index investing, but global investors reap the rewards of flexibility.
Underneath all three tips is one fundamental principle for global investing: research! A smart advisor can see past indexes and will understand how to pick a winning company. Find the undervalued, solid companies that will deliver for you long term. They’re out there, you just might have to look beyond the NYSE.
