Taking the search for alpha global

US stocks have been the darling of global equity markets, particularly over the last year with the formation of the ‘magnificent seven’. However, they are certainly not the only game in town and there are a plethora of opportunities that exist outside the US market as well.

Over the last 20 years, 30 out of the top 50 performers in the MSCI World Index have, on average, come from outside of the US (Exhibit 1). While over the last two decades, top performers have included US names like Nvidia and Illumina, international names like Tokyo Electron or Vestas Wind Systems have also stood out. In some years the balance is tilted towards the US and in other years more towards international equities, but the data highlights the significant breadth of opportunity that exists across regions for those fund managers that are able to compare the risks and returns of investments in different parts of the world.

Taking advantage of the global opportunity

The world is a pretty big place and narrowing down the opportunity set is no mean feat. You need a well-resourced global research platform, a trusted and repeatable investment process that can identify the best opportunities, and a strategy that can flexibly allocate capital to wherever those best ideas are.

Our Global Select strategy has strived to produce alpha across sectors and regions over time (Exhibit 2) by sticking to what we know best – stock fundamentals and risk. This disciplined approach has enabled us to consistently earn high returns across the very wide range of sectors and regions that we invest in, meaning we are not dependent on one or two sectors or regions as sources of alpha.

Our investment process in action:

Fast growing example in emerging markets

Our clients often ask us for our views on emerging markets and our response tends to be always the same. We don’t look for “EM exposure” in our portfolio (which we capture in any case through the international operations of many of our investee companies), but for exceptional businesses at the right valuation, regardless of where they are. Taiwan Semiconductor Manufacturing Company (TSMC) is a great example of that.

TSMC is a multinational semiconductor foundry and one of the largest chipmakers in the world, with a 90% global market share in leading edge processes. The semiconductor industry is forecast to exceed USD 1 trillion by 2030, growing at a compound annual growth rate of 7%. 

Traditional business making AI a core part of its productivity toolkit

RELX, the British multinational information and analytics company, is a testament of our commitment to find lesser-known disruptive opportunities in this dynamic environment. It owns and manages large databases of information for the scientific, technical, medical, and legal professionals for which it charges subscription revenues. The company enjoys a high share of recurring revenues and strong market positions, which lead to high margins and high returns.

LexisNexis, their legal solution, contains almost 300 million court dockets and over 144 million patent documents where AI can provide significant productivity gains for lawyers around the world. At a recent meeting, RELX’s CFO shared a comment from a large law firm client, who noted that, “We don’t believe that AI will replace lawyers, but that AI-enabled law firms will replace those that are only human-powered.”; a good endorsement of the RELX service proposition which we believe is underappreciated by the market.

High quality banking business in a structurally attractive market

HDFC Bank is India’s largest private sector bank with a strong brand, exceptional operating track record and a history of shareholder value creation. Its robust balance sheet and best-in-class asset quality have proven to be resilient across cycles over three decades.

HDFC has been profitable and fast growing since its inception in 1990s. ROA (Return on Assets) has fluctuated within a narrow 1.8-2.0% range over the past decade, corresponding to 16-22% ROE (Return on Equity)¹. Thus, our conviction in the company has only grown stronger over the years due to its ability to combine healthy growth and returns across the credit cycle, which has helped distinguish it from its peers. Given the deeply underpenetrated market for banking services and home mortgages in India, as well as the structural tailwinds for per capita GDP growth for the country, we believe HDFC Bank is ideally poised to capitalise on structural domestic credit growth.

Finally a US financial services company, but not a bank!

CME (Chicago Mercantile Exchange) is the world’s leading derivatives marketplace, with broad product coverage across different asset classes. Derivatives volume growth has been trending upwards, especially in the last few years owing to higher market volatility and investor participation. In addition, the macro backdrop with the economy slowing and uncertainties increasing plays into the defensive strengths of the company’s recurring revenue streams. Unlike most financial companies that find volatility a headwind, CME actually benefits from it. Higher volatility generally creates higher trading volume, which translates into higher revenues for the company.

We believe CME’s business model can sustain solid medium to long term revenue growth, led by secular growth in futures and options volumes. The company’s business model and diverse offerings, in our view, offer resilience during uncertain economic environments. Our allocation to CME in the strategy supports our investment thesis to focus the portfolio on asset light companies and service providers versus goods producers in the current market environment.

Conclusion

It is unlikely that the spotlight on the US stock market is going to be switched off anytime soon, but we think that by ignoring rest of the world in your search for alpha, you are missing out on special companies from across all industries that are making breakthrough innovations. Our Global Select strategy is one of our many global equity strategies that have a strong track record in scouring the world and identifying some of the most compelling investment opportunities for our clients.

¹ Source: J.P. Morgan Asset Management, data as of 19 Sep 2023.