top of page

Are You Getting the Right Non-US Exposure?

Tepid economic growth in the post financial crisis decade left investors searching for companies that could stand out from the market by disproportionately growing their profits. The technology-centric US economy became the preferred destination for capital, with profit growth far exceeding its non-US peers (Exhibit 1). This rise in profits combined with more multiple expansion drove US equities to deliver over 600bps of higher annual returns and higher returns on equity (Exhibit 1). That said, it might be appropriate for investors to sharpen their pencils and give their non-US equity exposure a closer look given the price being paid for US profit growth appears a bit stretched today, and past performance is not indicative of future results (Exhibit 2).


Exhibit 1: Superior EPS Growth and Multiple Expansion Drove a Decade of US Equity Outperformance

1.Represents trailing twelve-month data from 6/30/10 to 2/29/20.

Source: Artisan Partners/FactSet/MSCI. Figures represent the economic expansion from 7/1/09 to 2/29/20. Past performance is not indicative of future results. Current performance and data will vary from what is shown.

Exhibit 2: The Price Being Paid for Domestic Earnings Growth is Above Its Historical Average Today


Source: Factset/MSCI. Past performance is not indicative of future results. Current data will vary from what is shown.

A Pervasive Home Country Bias


US dominance appears to have led US financial professionals to steer their clients to invest primarily at home. As of June 2020, US financial professionals have allocated roughly 75% of their clients’ portfolios to domestic equities (Exhibit 3). While it is difficult to determine what the appropriate mix should be, particularly given varying degrees of risk tolerance and suitability, average returns over the past decade may have been strong enough to lead financial professionals to prefer US equities. However, this focus on US investing could have led these same investors to overlook investment opportunities in non-US domiciled companies.


Exhibit 3: Non-US Equity Exposures Do Not Align with GDP Distribution

Source: BlackRock as of August 25, 2020.


Top Performing Stocks in the MSCI AC World Index Have Been Domiciled Outside of the US


Since 2010, the majority of the top 50 performing stocks in the MSCI AC World Index (ACWI)—designed to track broad global equity-market performance and a benchmark for $4 trillion of global equity assets—were domiciled outside of the US (74% on average for any given year). These same non-US companies within the top 50 tended to be in the consumer discretionary, industrials and financials sectors; located in emerging markets; mid-caps; and these stocks delivered average annual total returns well ahead of US equities in general (Exhibit 4).


Exhibit 4: MSCI USA Total Return vs Non-US Equities in the Top 50 Performing ACWI Stocks

Source: Artisan Partners/FactSet/MSCI. As of 31 Dec 2021. Past performance is not indicative of future results.


Drawbacks of Investment Strategies Closely Resembling the ACWI


Attempting to gain exposure to the top performing non-US stocks by investing in vehicles or strategies closely resembling the ACWI’s market-capitalization and country allocation methodology has its drawbacks. Foremost, this approach lacks flexibility to adjust to broader market conditions and company specific developments. The ACWI’s capitalization-weighted approach—which is mostly static year-to-year—does not always align with the opportunity set. In addition, US domiciled companies represent 60% of the weight in the ACWI, and nine of the top 10 largest holdings have been US-domiciled over the past decade. With the top 10 holdings representing roughly 15% of the overall index and primarily concentrated within the US information technology sector, investors who are seeking to diversify their portfolios towards a global allocation could be unknowingly overexposed to US-domiciled companies. Lastly, the ACWI’s top 50 performing non-US stocks had an average weight of just 0.6% over the past decade, limiting their contribution to the index’s overall performance.


Unconstrained Fundamental-Oriented Investment Strategies Could Help


An unconstrained bottom-up global investment strategy could provide a better way to gain exposure to non-US domiciled companies. Over the past two economic expansions, profit growth has been the primary driver of stock prices. This bodes well for skilled investment managers who can identify company-specific profit drivers through bottom-up fundamental analyses—oftentimes, this approach includes finding companies with above-average growth potential, wide competitive moats, reasonable valuations and/or identifiable catalysts to unlock shareholder value.


The non-US opportunity set for equities is also larger and generally less researched. With ~40K companies outside of the US (vs. ~4K in the US), a bottom-up oriented strategy could cast a wider net when not constrained by an index’s set universe. Compared to US companies, other developed market companies are covered, on average, by two fewer sell-side analysts and three less for those in emerging markets. This can enable bottom-up oriented managers to invest in more inefficiently priced companies. When effective, an unconstrained, global approach can enable investors to differentiate returns relative to a benchmark index, as opposed to a passive global strategy, which will generally be in line with its returns. However, with greater reward, may also come greater risk, and investors should do their homework to find the right manager with a track-record of success who will meet their investment criteria.

Comments


DISCLAIMER  |  This information has been prepared by Copia Investment Partners Limited (AFSL 229316 , ABN 22 092 872 056) the issuer, distributor and responsible entity of the Artisan Global Discovery Fund. This website provides information to help investors and their advisers assess the merits of investing in financial products. We strongly advise investors and their advisers to read information memoranda and product disclosure statements carefully and seek advice from qualified professionals where necessary. The information on this document does not constitute personal advice and does not take into account your personal objectives, financial situation or needs. It is therefore important that if you are considering investing in any financial products and services referred to on this document, you determine whether the relevant investment is suitable for your objectives, financial situation or needs. You should also consider seeking independent advice, particularly on taxation, retirement planning and investment risk tolerance from a suitably qualified professional before making an investment decision. Neither Copia Investment Partners Limited, nor any of our associates, guarantee or underwrite the success of any investments, the achievement of investment objectives, the payment of particular rates of return on investments or the repayment of capital. Copia Investment Partners Limited publishes information on the document that is, to the best of its knowledge, current at the time and Copia is not liable for any direct or indirect losses attributable to omissions from the document, information being out of date, inaccurate, incomplete or deficient in any other way. Investors and their advisers should make their own enquiries before making investment decisions. © 2023 Copia Investment Partners Ltd.

The Artisan Global Discovery Fund invests all or substantially all of its assets in Artisan Global Discovery Fund (Fund), a sub-fund of Artisan Partners Global Funds plc. Artisan Partners Limited Partnership serves as investment manager to the Fund. Artisan Partnership Limited Partnership, its affiliates and Artisan Partners Global Funds plc (together, Artisan Partners) are not affiliated with Copia Investment Partners. Artisan Partners does not take any responsibility for the accuracy or completeness of the contents of these materials, any representations made herein, or the performance of the Artisan Global Discovery Fund offered by Copia Investment Partners. Artisan Partners disclaims any liability for any direct, indirect, consequential or other losses or damages, including loss of profits, incurred by you or by any third party that may arise from any reliance on these materials. Artisan Partners is not responsible for, nor involved in, the marketing, distribution or sales of shares or interests in the Artisan Global Discovery Fund and is not responsible for compliance with any marketing or promotion laws, rules or regulations; and no third party, other than Copia Investment Partners, is authorised to make any statement about any of Artisan Partners’ products or services in connection with any such marketing, distribution or sales. Past performance by any other funds or accounts advised by Artisan Partners, including the Fund into which the Artisan Global Discovery Fund invests, is not indicative of any future performance by the Artisan Global Discovery Fund. © 2022 Artisan Partners. All rights reserved.

The rating issued November 2022 APIR OPS8304AU is published by Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec). Ratings are general advice only, and have been prepared without taking account of your objectives, financial situation or needs. Consider your personal circumstances, read the product disclosure statement and seek independent financial advice before investing. The rating is not a recommendation to purchase, sell or hold any product. Past performance information is not indicative of future performance. Ratings are subject to change without notice and Lonsec assumes no obligation to update. Lonsec uses objective criteria and receives a fee from the Fund Manager. Visit lonsec.com.au for ratings information and to access the full report. © 2022 Lonsec. All rights reserved.

The Zenith Investment Partners (ABN 27 103 132 672, AFS Licence 226872) (“Zenith”) rating (assigned APIR OPS8304AU April 2023) referred to in this piece is limited to “General Advice” (s766B Corporations Act 2001) for Wholesale clients only. This advice has been prepared without taking into account the objectives, financial situation or needs of any individual, including target markets of financial products, where applicable, and is subject to change at any time without prior notice. It is not a specific recommendation to purchase, sell or hold the relevant product(s). Investors should seek independent financial advice before making an investment decision and should consider the appropriateness of this advice in light of their own objectives, financial situation and needs. Investors should obtain a copy of, and consider the PDS or offer document before making any decision and refer to the full Zenith Product Assessment available on the Zenith website. Past performance is not an indication of future performance. Zenith usually charges the product issuer, fund manager or related party to conduct Product Assessments. Full details regarding Zenith’s methodology, ratings definitions and regulatory compliance are available on our Product Assessments and at http://www.zenithpartners.com.au/RegulatoryGuidelines

bottom of page