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We pursue our investment objective by focusing on identifying companies that can help deliver market-beating returns over every rolling three-year period. We will attempt to provide geographical exposure similar to our benchmark, though we will not blindly mimic weightings or holdings on a geographic or industry composition basis.
We believe that great companies are not found solely in America or on U.S. stock exchanges, and that anyone who limits their investing search to U.S. companies is creating artificial restraints that will harm their long-term investing returns.
Additionally, we believe that in the coming decades a significant portion of global growth will be driven by the rise of the middle class in emerging markets; while U.S.-based multinationals will benefit from this trend, investors may have greater opportunities to benefit by taking a global approach to this global phenomenon. Just as American companies are not competing solely for domestic consumers, they are not competing solely against American counterparts, and the victor will not always live in our own backyard.
Finally, we believe investors have a better chance of finding misunderstood or undervalued companies in markets that aren't highly scrutinized. Similar to the theory that U.S. small caps offer better opportunities because they are generally less covered by Wall Street, we think investing in markets less frequented by your average investor (or index-based ETF) increases the chances of uncovering value and outsized returns.
Strategically, we are bottom-up investors looking for great companies rather than making macroeconomic calls (although we do consider macroeconomic trends in evaluating companies). Ideally we would find companies that we think offer attractive value propositions - companies with large and/or growing markets, sustainable competitive advantages, clear paths to solid cash flow generation, and the ability to compound shareholder value over the course of many years - regardless of their listed market.
Because we are unable to trade in any currency other than U.S. dollars for accounts without margin capabilities, however, our international investing universe is currently restricted to U.S.-listed foreign companies and foreign-focused ETFs.
While this isn't our ideal situation, it doesn't alter our approach to investing. We are still looking for companies that we believe have strong growth opportunities and dominant competitive positions that we can hold for years and will grow the value of our investment. They simply have to be listed on U.S. exchanges and have enough daily volume to handle our rapidly growing SMA funds.
We are generally long-term investors with theses formed around three to five-year horizons, although from time to time we will execute more "trade-like" transactions in order to take advantage of opportunities we think have attractive risk/reward payoffs (e.g. merger arbitrage, event-driven price moves, or short-term market overreactions).
We do not hedge currency exposure, as our research suggests that this is a difficult game to win with consistency. Further, we believe that in the long run, currency fluctuations will balance out and provide a portion of the diversification benefit of international investing.
As mentioned above, we're long-term investors looking to find companies we can own for many years to come, so we don't anticipate much activity on a day-to-day basis. We will, however, maintain and update, as necessary, estimates of fair value for all the companies in our portfolio. Stocks that appear overvalued may not be sold immediately, but will be considered a source of capital for new or better ideas (those which we think have better risk/reward profiles).
Admittedly, international investing brings additional risks (corporate governance, exchange rates, and sovereign risks, to name a few). By being forced (for the time being) to invest solely in U.S.-listed companies, we can reduce some of these, though many still remain.
To address these added risks, we will limit our investment in any single company to under 8% and will diversify across industries within the same country, so as not to hold more than 15% of our portfolio in any single industry in a country (e.g. "Chinese banks" or "South African miners").
We will also attempt to diversify across industries throughout the portfolio, but this may not always be possible, as some emerging markets with less mature stock markets will have fewer companies in which to invest than U.S. investors may be used to (note that less-mature stock markets are often dominated by banks and utilities).
As a trade-off for investing in less well-traveled markets, international investors should recognize that liquidity is often lower in international markets, particularly emerging markets. This means they can be more volatile than U.S. markets. While we don't think using volatility as a proxy for risk is appropriate (we view risk as the potential for permanent loss of capital), investors should be well-aware of the nature of the investments to which they will likely be exposed.
Account minimums may apply. All investments involve risk and may lose money. MFWM makes no assurance that investment objectives will be met. Clients should be aware that their individual account results may not exactly match the performance of the Model Portfolios. Past performance is no guarantee of future results.
Motley Fool Wealth Management retains the right to revise or modify portfolios and strategies if it believes such modifications would be in the best interests of its clients.