Investment Philosophy

Our investment philosophy, which has been in place for more than 20 years and has not changed since the inception of the International Value strategy in 2002, is predicated on the following beliefs:
  • Every asset has a “fair value” that can be determined by fundamental in-house research.
  • Over time, market prices should move toward these fair values.
  • We seek to identify cheap and expensive assets by comparing current prices with their fair values.
  • We believe that investment decisions, based on these values can result in superior long-term returns at appropriate levels of risk.

Investment Process

Information advantage
The investment process is underpinned by J.P. Morgan’s global research capabilities. This is comprised of approximately 70 highly-seasoned career analysts who operate out of four regional centers: New York, London, Tokyo and Singapore.
 
Individual analysts specialize by sector on a regional basis (European autos or Asian autos), then come together to form global sector teams (autos).
 
Common valuation model
Regardless of which sector or region of the world they cover, all our analysts use the same analytic framework–J.P. Morgan’s Dividend Discount Model (DDM). Based upon their research (analysis of corporate financial statements, meetings with company management, knowledge of the sector), analysts generate earnings and cash flow estimates for each company with an emphasis on forecasting each company’s normalized (mid-cycle or sustainable) level of earnings and the rate at which those normalized earnings are expected to grow over the intermediate term.
 
This focus on intermediate, normalized earnings ensures: that we value companies based on their sustainable level of earnings rather than on peak or trough earnings; and that we identify attractively valued companies sooner than other firms that focus on just short-term estimates (one to two years out).
 
The proprietary estimates generated by our analysts serve as inputs into the DDM, which in turn uses them to synthesize a projected dividend stream for each stock. The model then equates the net present value of that dividend stream to the current price of the stock to derive each stock’s Dividend Discount Rate (DDR), a measure of each stock’s internal rate of return. The DDR serves as the primary valuation metric for the strategy. The higher a company’s DDR, the more attractively-valued the stock.
 
Portfolio construction
Focusing on stocks whose DDRs rank in the top two quintiles within each sector, portfolio managers then "zero in" on the names that combine the following characteristics:
  • Attractive valuation: DDR rankings are supplemented with other traditional valuation measures, such as free cash flow yield, dividend yield, price-to-normalized earnings, and price-to-book.
  • Sustainable or improving ability to generate cash flow
  • Return-focused, shareholder-friendly management
  • Timely catalysts that will enable the stock to realize its inherent value.
To ensure that stock selection is the primary driver of returns, sector deviations relative to the benchmark, MSCI EAFE Value Index, are tightly controlled (+/-5%). Geographic weightings are a by-product of the stock selection process but are subject to broad constraints for risk control purposes.