International Investing in Theory
Sometimes I wish I lived in Theory. In Theory, investing is such a reasonable, predictable activity. Theoretical Investors know that they’re buying pieces of a company’s future earnings stream. And, being rational, they know that they’re better off buying $1 worth of future earnings for $0.60 rather than for $0.90. In Theory, investors will logically and smoothly migrate from high-cost providers to low-cost providers of an earnings stream.
In Theory, if investors saw a low price/earnings ratio of 13 on one continent (let’s call it “Europe”) and a high price/earnings ratio of 26 on another continent (“America,” for the sake of our hypothetical), they would migrate their investments from America (causing returns to fall) to Europe (causing returns to rise). Easy peasy, problem solved, and everyone gets on with life.
But, for better and worse, I don’t live in Theory. I live in New York. And international investing here is a lot messier than international investing there, though the bagels are a lot better. The one advantage that I have over Theoretical Investors is that I have access to the Artisan Partners.
Map of Theory, generated using Google Gemini.
International Investing in the Real World
I have been a professional investor for my entire adult life. A few years ago, I was asked to join a private school endowment’s investment committee. Our first goal was to improve on the basic asset allocation framework with the eye to generating higher returns if possible.
Step One of the endowment’s investment process was taking a close look at the percentage weights for internationally developed market equities. The endowment had 18% invested in a passive international developed market fund, which seemed high to me.
To be fair, we were working with constraints:
- We had no full-time staff to “trade the market” or to “pick stocks.”
- We had adopted a passive investing model. Given the success of passive investing in US equities, it made sense to do the same for international equities, emerging equities, and fixed income. That’s what the endowment’s investment committee had pursued over the last eight years, smartly and successfully. But it became obvious that cheap and passive may not always be best when we saw the bond market collapse and the very boring returns of international and emerging market stocks.
- We were constrained by the Expected Return for each asset class, provided by (not the endowment, not the financial intermediary, but) a third-party research firm, which was a critical ingredient in determining the weights of the main asset classes in the portfolio.
In Asset Allocation & International Equities (June 2024), I describe the process by which we abandoned the Expected Returns that could only exist in Theory, looked at actual asset class performance over the past quarter century to come up with a different Expected Return for International stocks and emerging market stocks and recalibrated the portfolio weights.
Our analysis concluded that if we were to carry a passive portfolio of international equities, we should hold about 5-6% (much less than the 18% derived from the Yale Model). The endowment decreased international equities in favor of US equities as Step One.
The committee also agreed there was room for Step Two: hiring an active manager for this asset class.
Readers of the June article will recall some questions asked by committee members:
- “Why not zero for international stocks? Why should we invest at all in foreign stocks?”
- “Don’t US companies get a third of revenues from abroad? If we invest in US stocks, don’t we automatically get foreign exposure?”
- “International stocks have provided little diversification to US stocks. What’s the benefit of holding an asset class with lower returns and positive correlation to US stocks?”
Those questions haunted me.
Enter the Artisan Partners
I knew smart investors had thought about this and must have articulated an answer. I had in mind one such investor, David Samra, manager of the Artisan International Value Fund. I spent many hours listening to Mr. Samra’s interviews on podcasts. I also found a meaningful video from the 2023 Artisan Partners Investor Conference, titled, International Investing: The Complexity behind it and Why it lends itself to Value Investing. David’s case for his fund, his investment style, and his group of stocks were the insight I needed. I made it required viewing for the endowment’s investment committee.
I was in touch with Mr. Samra’s team to explore the possibility of investing in his closed Artisan International Value Fund (ARTKX) for the endowment, when the team invited me to attend two full days of the Artisan Partners Investors Conference at The St. Regis Hotel in New York in May 2024. Thirteen fund manager teams representing the full breadth of Artisan’s fund offering spoke with great candor and depth about their investment thesis and their stock selection process. Besides the intellectual gratification of listening to smart investors and learning about potential funds to add to my portfolio, my ears were attuned to foreign markets and international stocks. This was my chance to learn.
The Artisan Partners are divided into a series of semi-autonomous teams, each with its own mandates, style, analyst corps, and discipline. The teams in attendance were
| Team | Funds |
| International Value | International Value (closed) International Explorer |
| Global Value | Global Value Select Equity |
| US Value | Value Mid Cap Value Value Income |
| Global Equity | Global Equity International |
Day One: Insights from the International Value, Global Value, and Global Equity Teams
Without doing many of the managers justice, (I don’t talk about their funds, their investment style, or their track records), I reiterate some of the memorable points about foreign stocks and markets that I could write down fast enough on paper.
Dan O’Keefe and Mike McKinnon of the Global Value Team:
- All investing is global investing. Domicile of incorporation is meaningless.
- Cannot figure out why anyone would want to own any non-US Index product. Active is the only solution in international markets.
- Agree that the US is light years ahead in innovation and talent pool and international companies are permanently disadvantaged. Yet, consider this:
- Shell/Total: trade at a significant discount to Exxon and Chevron. Economic exposure to Energy has nothing to do with Europe. We are going to need oil and gas for a long time to come. Net Zero is not going to happen.
- BABA: very cheaply priced. Why? People have decided China is uninvestible. Meanwhile, Apple gets 20% profits directly from China. Apple’s products are manufactured in China. Apple trades at 30x earnings while Baba trades at 5x earnings. Chinese risk isn’t priced into Apple or Tesla.
Beini Zhou and Anand Vasagiri of the Artisan International Explorer Strategy
- The duo said it is still possible to hit the pavement in developed foreign countries, glean insight into character and management, and improvise on active management in a way that one can no longer do in the US. As an example, the team snoops around in parking garages, tracking the cars driven by company owners to determine if their heart is in the money or in the company.
- “If it doesn’t pass our initial smell test, we don’t care how cheap it looks.”
- MFO published a profile of Artisan International Explorer Fund in September 2023.
Tom Reynolds, Dan Kane, and Craig Inman of the US Value Team
- Diageo: British multinational alcoholic beverage company with over 200 brands. 50% revenue in North America and 50% Rest of the World. Largest spirit company in the world. When work from home ended, demand for home stash declined as people went back to work and visited bars instead. End of Covid, along with disappointment in Latin American sales, death of then CEO, and fears of changes in consumption from the Ozempic effect, have created value in the stock.
Mark Yockey, Andrew Euretig, and Michael Luciano of the Global Equity Team
- Europe and Asia have some dominant players with dominant market share and pricing power
- ASML: (a Dutch company) makes the machines that make the semiconductor chips powering technology revolutions
- UBS: Dominates Private Wealth Management outside the USA.
- Novo Nordisk: Ozempic producer. “This is just the beginning”.
- Air Liquide & Linde: 2 of the Top 3 global players of industrial gases. 75% market shares. 10% Earnings growth for the last 50 years. They have pricing power.
- CRH: Builds roads and aggregate. US infrastructure bill show improve fundamentals significantly. Is moving domicile from London to US.
- Safran: As airplane manufacturing gets delayed, the duration of existing planes lengthens and engine servicers benefit.
- BAE Systems: Submarine and defense contractor.
- There were many other examples, but I ran out of writing breadth. Mark Yockey is a seasoned investor and someone I want to read more about/listen to his views.
There were some stocks mentioned that were crossholding across multiple Artisan funds.
For example, take the London Stock Exchange (LSE). Only 3% of LSE’s revenues are now derived from shares trading. The LSE has assembled a portfolio of proprietary databases who sells data on subscription and account for a lion’s share of their revenues. The MFO Premium search engine runs based on Refinitiv data (an LSE company).
Because these managers are on the Artisan platform (and are thus well accomplished), because they have done this for a while, and because their confidence in stocks and analysis is far superior to mine, they knew how to narrate the story in a convincing way for their audience. I figure that there were about 50-75 mid-to-large capitalization international companies in interesting businesses, growing earnings, and with dominant market shares. A good active manager-investor for this asset class would provide market exposure along with the possibility of significant outperformance.
Day Two: David Samra and the International Value team
On day two of the conference, David Samra, Joe Vari, Ian McGonigle, and Charlie Page (all senior managers) of the International Value Fund presented for two full hours (including Q&A).
Mr. Samra laid out the guiding principles for his fund:
- Will avoid places/stocks where minority investors will not be respected
- To buy a stock, something must be going on right now poorly with the financials of the company (there must be a value opportunity).
- Fund’s team has decades of cumulative market knowledge of management, of boards of companies, and can use their connections to help steer leadership as well as point boards to exceptional leaders in the industry. Talking to management per se is not valuable, but talking to management over decades is greatly valuable because one can pick up cues that novice investors cannot.
- Complexity provides opportunity. If you don’t look for (market) exposure but care about creating wealth then the kind of active management in this fund might be meaningful.
The top 10 positions are 40% of the portfolio: I like funds that take large, concentrated bets where possible. The whole purpose of getting away from passive’s 5000 positions with insignificant weights is to own stocks that can move the needle. Holding Concentrated bets means managers must be more right than wrong. There is no hiding. If the manager doesn’t know how to make money, it will be obvious to an astute observer.
The turnover is 20%: which means 20% of the portfolio roughly turns over every year. That’s a healthy amount of time for value to surface and the stock thesis validated.
The AUM of the fund is $35 Billion: Other than Vanguard’s passive Total International Stock Fund, which has a cool $430 billion in management, Mr. Samra’s fund is one of the largest in international markets for US investors. Size is important to institutional investors looking to enter or exit their position without moving the fund NAV too much.
The fund has been around for over 21 years with the same manager at the helm: I didn’t see any desire to retire on Mr. Samra’s part. In active management, cumulative growth of intuition and market knowledge creates the lollapalooza moments. Living through market crashes, corporate events (mergers, bankruptcies), and surviving provides the history needed to gain confidence in how the world works.
He described one such moment when the Swiss government handed over Credit Suisse to UBS for what the team calculated was a negative equity value of tens of billions (meaning UBS was being paid to buy out CS).
“The fund bought a large stake in UBS given this gift they were receiving. UBS price should have gone up, but it declined, and we ended up buying a lot more shares of UBS.”
Joe Vari, Ian McGonigle, and Charlie Page spoke at length about Samsung, Danone, Arch Capital, and Unilever. The stock analysis for each company was too long to include in this note.
At the fund level, Mr. Samra mentioned that with small pools of capital, one can cut and run. But at the size of his fund, they must affect corporate change to monetize value embedded in stocks.
Bottom Line: A real-world endorsement of Mr. Samra and Artisan International Value
At the endowment’s investment committee, we spoke at length about the International Value Fund and David Samra’s investment style. The committee liked that Mr. Samra is a seasoned investor whose expertise, track record, and positioning in the international developed market asset class would be a good substitute for our passive Vanguard fund. It was easy to see that in most cycles and observation windows, the fund did better than the passive. In crashes, it did no worse than the passive.
The committee agreed that the Artisan International Value Fund would be a suitable active manager for half of our international allocation, or about 2.5%. As the committee gets comfortable with the fund, we would look to increase our exposure to international equities through this fund. We were able to get in through our financial intermediary.
Starting the discussion on active investing at the investment committee level has already yielded benefits. There is increasing sophistication to investigate the kind of managers who would add value to the endowment portfolio. For example, on the fixed income side, we have now allocated 11% of the fund to six short-duration floating rate high-yield funds, up from zero. (We reduced the total bond portfolio from 33 to 22%).
As we build reports to compare the performance of active vs passive and track them in the portfolio, we find that we can build complementary pools of investments. No portfolio can always be safe, secure, and hope to generate returns. Risk must be taken. The hope is to find complementary managers that can still work in the endowment’s plug-and-play model.