An allocation to international stocks has long been considered an essential part of a well-diversified equity portfolio, but with increasing globalization and the rise of emerging markets, investing in non-U.S. equities has become more critical than ever. Many investors have traditionally focused on the equity markets of Europe and Asia, as they have been long-established, transparent and liquid. This approach may create some investing inefficiencies and gaps, however, as the global economy and markets have evolved over the last few decades. Emerging markets, for example, have grown from about 30% of global gross domestic product (GDP) in 1990 to an estimated 50% in 2012, according to the International Monetary Fund.1 Investors focused solely on Europe and developed Asian markets may be missing exposure to some of the world’s largest and fastest growing economies.
International equity strategies that combine major developed and emerging economies into a single approach have proliferated over the last several years, in part reflecting strong demand from institutional investors seeking a comprehensive approach to international equity investing. The MSCI ACWI (All Country World Index) ex USA is an example of a benchmark that provides exposure to a broad range of developed and emerging markets. The index includes large- and mid-cap companies in 23 of 24 developed markets—excluding the U.S.—and 21 emerging markets. Containing more than 1,800 companies, the index is well diversified and covers about 85% of the total publicly traded market capitalization outside the U.S. In this Q&A, Jason Campbell, managing director and lead portfolio manager of TIAA-CREF’s new International Opportunities Fund, talks about his approach to international equity investing and some of the investment themes that he’s been focusing on lately.
What are the benefits of investing in a single international equity fund like the International Opportunities Fund?
Because we live in an increasingly global economy, having diverse exposure to key markets is critical to capturing growth wherever it occurs. Since the new fund is not confined to either developed or emerging markets, it’s free to seek out the best investment opportunities the global economy has to offer outside the U.S. We’re not constrained by geography or the economic maturity of a market and can look to invest in what we think are the best companies, whether they happen to be based in Japan or India, for instance. This approach expands our potential to add value, while maintaining appropriate levels of risk and other portfolio characteristics relative to our benchmark. At the end of the day we want to invest in the best 100 or so companies outside the U.S., regardless of where they are based.
What’s the investment philosophy of the International Opportunities Fund?
We employ a bottom-up approach, which means that we invest in companies based on their own merits, without regard to their sector or to larger macroeconomic conditions. We fundamentally believe that some companies are superior to their peers and will therefore outperform regardless of industry and macroeconomic circumstances.
What are some of the specific factors you look for?
The bottom-up investing philosophy is supported by three pillars: One, positive structural change at a company; two, sustainability of the change; and three, well-timed investment decisions that enable us to take early advantage of these opportunities. By positive structural change, I mean we are looking to identify companies in the early stages of a structural growth opportunity that is driven by differentiated products and/or services. We then assess the sustainability of this advantage. Will they maintain strong barriers to entry, continue to outgrow their competition, and accelerate top-line growth with margin expansion? The third pillar involves careful timing of our investment decisions. We believe that identifying an investable universe early is critical. Buy and sell decisions are based on our research and analysis, which we use to test the validity of our thesis and our understanding of market volatility, which we try to use to our advantage.
What are your current investing themes?
We’re focused on building a portfolio completely from the bottom-up, which means we seek to identify the best companies in the international equity universe and invest in them. The sum of these parts, however, sometimes reveals an interesting larger story or theme. One such theme we’ve seen in recent years is that economic stress can create new opportunities for investment. We saw an example of this materialize out of the battered U.S. construction industry, which fell considerably during the economic downturn of 2008-2009. Construction companies that remained in business during this period still had equipment requirements, but in many cases, they were no longer able to buy because their cash flow was poor.2 A large international firm with an established U.S. presence began leasing equipment to these companies. The construction companies like this new variable cost model for capital expenditures so much that they’re continuing to lease even as the industry is recovering. As a result, the leasing company has grown considerably during an extremely challenging period.
Another very different sort of theme is the global shift to mobile micropayments. Credit card companies and banks are creating relationships with cell phone companies such as Verizon in the U.S. and Vodafone in the U.K. The result is you can visit a Starbucks in Hong Kong and use your mobile phone as a credit card, which is hugely convenient for the consumer and the business. There are many ways to play this theme. For instance, a French company which makes the chip for the banking data on the phone; and a U.K.-based company that is making software that allows all parties involved in a transaction to communicate and prevent fraud.
What risks should investors consider when investing overseas?
Investors should consider the risks of equity investing in all geographic regions very carefully. One of the potential advantages of investing in an international equity fund, particularly one with such an expansive investable universe, is the ability to shift out of a country. For example, if Argentina was in the benchmark, which it isn’t any longer, and its government started putting on capital controls and raising taxes, we could look for better opportunities in Brazil. Or take China, where they’re tightening monetary policy to slow consumption; we can go to India where consumption is growing very strongly. I think that kind of flexibility helps us manage risk.
How stable and transparent are overseas markets?
The day I started my investment career in 1997 was the day that Thailand devalued its currency, which ushered in the worst emerging markets crisis since the early 1980s. The regulators in those countries have learned a lot and have made significant improvements in the interim. They realized the need for transparent rules so investors can feel comfortable. Brazil is a great example of an emerging market that has significantly progressed over time. For decades, Brazil suffered repeating episodes of currency instability and hyperinflation. Since the early 2000s, however, Brazil has implemented many changes that have steadied its currency, the real, and calmed inflation. The results have attracted strong interest from foreign investors seeking to capitalize on a growing economy.
Could you tell us a little more about your background?
I joined TIAA-CREF in 2005 from Nicholas-Applegate and have 15 years of international equity investment experience as an analyst and portfolio manager in all of the international developed markets, and Asia and Latin America in the emerging markets. I’ve been managing an EAFE + Canada segment within the CREF Global Equities Account since April, 2009 and an ACWI ex USA segment since February, 2012. I earned a B.A. in Latin American Studies from San Diego State University and an M.A in Latin American Studies with an emphasis in Economics from San Diego State University.
1 International Monetary Fund data, based on purchasing power parity share of world total, as of October 2012.
2 The purpose of this material is to provide an example of how the portfolio management team evaluates potential investment opportunities. All information shown is historical, is provided for informational purposes only and should not be deemed as a recommendation to buy or sell the security shown above.
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Investments in foreign securities are subject to special risks, including currency fluctuation and political and economic instability. Emerging market investments are subject to political risks and currency volatility.
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