When the financial crisis hit Europe, many advisors and their clients had the same reaction: they ran away and ensconced themselves in the supposed security of the U.S. market.
A bias toward domestic investment is understandable, but the U.S., big as it is, is not the world. We exist in a global economy and for advisors and their clients to restrict their thinking to within our borders means missing out on some tremendous companies and potentially lucrative investments. Theres a lot going on in the world today, and advisors who restrict their clients portfolios to only domestic securities may be doing them a disservice. Certainly from a fiduciary standpoint, they should be considering all the options available.
For those who may be new toand possibly even a little skittish aboutglobal investing below are a few tips to keep in mind when venturing outside the U.S. investment market.
Look for the Dominant Players
A good way to approach global investing is by determining who the dominant players are in a particular industry. If you want to invest in that industry, you have to go where the players are.
It turns out that some of the largest companies in the luxury goods industry are French companies. Without a global focus, investors will never get exposure to LVMH, whose stable of brands includes Louis Vuitton and Moet Champagne, or PPR (which will change its name to Kering in June), which owns Gucci and Bottega Veneta. And then theres Compagnie Financière Richemont SA, a Swiss Company, whose brands include Cartier, Van Cleef and Arpels, Piaget and Alfred Dunhill.
Everything is Connected
Even advisors with a strictly domestic focus have to be aware of what is going on in other parts of the world because our economy is global. If Europe is weak, that will impact U.S. companies because they are customers for U.S. goods.The U.S. is currently a low growth market, but regions like Asia and Africa are high growth areas and there are ways a global portfolio can really take advantage of that without taking on too much additional risk.
Dont Follow the Pack
History has shown that the greatest opportunities may exist when most investors are afraid of a region. The key in this case is not to go all in. Advisors dont have to jump all in to Europe or all in to global, but they should absolutely be open to looking at companies wherever they are based.
Looking at the markets that others are not looking at is the way to go. Youre not going to make money going with the pack. If youre not at the front of the pack, youre really going to be in trouble.
The key is for advisors to determine if there is a way to take advantage of an overseas crisis. In 1987 when the U.S. stock market virtually crashed investors who stepped up did well. Three years later after the high yield markets blew up investors who got involved did well. In 1997, we had the Asian Contagion, and investors fled Asia in a panic. During that period, there were wonderful bargains of global businesses that were in Asia, and investors who had the gumption to go in over the next few years made hundreds and hundreds of percent in gains.
Focus on Companies, Not Countries
Dont focus too much on where a company is headquartered. Pay more attention to what the company does and what value its adding. A stellar example is Siemens. Its a German company, but its really a global company that does business in every country around the world.
Know What You are Buying
There are stocks advisors can buy for their clients that give a broad range of exposure, but if they only consider the country where the company is domiciled, they are not seeing the full picture. Vivendi is a great example of this. On the surface, it is a French media company, but drilling down tells a more compelling story. Vivendi controls video game giant Activision and Universal Music, as well as broadcast and pay television operations, telecom businesses and a broad range of assets with minimal synergies in markets around the world. Bollore is another French company, but actually gets most of its profits from Africa, which means that investors are getting true emerging markets at a discounted price.
Be Nomadic
Advisors looking to invest globally should have a mandate that allows flexibility so they can trek to where the values and the opportunities are. Its important to be able to take advantage of global markets when they are cheaper and more compelling and when they are not to be able to retreat back to the U.S.
Having a strictly delineated international allocation can force an advisor into making less than optimal moves. A strategy that, for example, always puts 25 percent in Asia and 15 percent in Latin America and the rest in the U.S. could be overly restrictive. Some funds do that, and then they have to force themselves to find things for those markets and end up filling them up with ETFs to create a blended product that behaves like an index.
Get Paid for the Risks You Take
Once they venture outside the U.S., investors should be paid for the additional risk they are assumingthe stock should be cheaper, offer more upside, give a broad range of exposure, some kind of margin of safety.
As a rule of thumb, Europe should be cheaper than the U.S., Asia cheaper than Europe, and Africa cheaper than Asia, but thats only a top line consideration. Advisors should not make any decisions before they actually drill down on a specific investment.
Ask the Basic Questions
The fact that its price is low should not be reason enough to purchase a stock. This is true whether the investment is global or domestic. Investors have to ask: what will make this stock go up? What is this company doing to create value for shareholders that make it a must-buy? If there is not a good answer, then perhaps the best course is to walk away. Advisors should be looking for stocks not simply that are low-priced, but that are under-valued.
Ultimately, the global market can present a tremendous opportunity for advisor to find value and outsized returns for their clients. As in any investment undertaking, it is imperative that advisors do their homework and understand what they are getting into, but history has shown it can be well worth the effort.
David Marcus is Co-founder, Chief Executive Officer and Chief Investment Officer Evermore Global Advisors, LLC. Evermore Global Advisors is an investment manager that employing an active value investment discipline to find undervalued companies anywhere in the world with the potential to yield long-term value for investors.
