Philosophy and Strategy
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, 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 assets under management.
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.
Portfolio Management Process
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"). However, for purposes of these restrictions, we generally will not look through the ETFs in the portfolio.
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.
The value of investments in the International Strategy may increase or decrease, which will cause the value of the investor's portfolio to increase or decrease. Investors may lose money on their investment and there can be no assurance that the strategy will achieve its investment objective and goals.
The principal risks inherent in this strategy are:
Foreign and Emerging Market Investments
Investing in securities of foreign companies involves risks generally not associated with investments in the securities of U.S. companies, including the risks associated with fluctuations in foreign currency exchange rates, unreliable and untimely information about issuers, and political and economic instability. Investing in emerging market countries involves risks in addition to and greater than those generally associated with investing in more developed foreign markets. In many less-developed markets, there is less governmental supervision and regulation of business and industry practices, stock exchanges, brokers, and listed companies than there is in more developed markets. The securities markets of certain countries in which MFWM may recommend investment may also be smaller, less liquid, and subject to greater price volatility than those of more developed markets.
Depositary Receipt Risk
American Depositary Receipts ("ADRs") are typically trust receipts issued by a U.S. bank or trust company that evidence an indirect interest in underlying securities issued by a foreign entity. Global Depositary Receipts ("GDRs"), European Depositary Receipts ("EDRs"), and other types of depositary receipts are typically issued by non-U.S. banks or financial institutions to evidence an interest in underlying securities issued by either a U.S. or a non-U.S. entity. Investments in non-U.S. issuers through ADRs, GDRs, EDRs, and other types of depositary receipts generally involve risks applicable to other types of investments in non-U.S. issuers. Investments in depositary receipts may be less liquid and more volatile than the underlying securities in their primary trading market. If a depositary receipt is denominated in a different currency than its underlying securities, a portfolio will be subject to the currency risk of both the investment in the depositary receipt and the underlying security. There may be less publicly available information regarding the issuer of the securities underlying a depositary receipt than if those securities were traded directly in U.S. securities markets. Depositary receipts may or may not be sponsored by the issuers of the underlying securities, and information regarding issuers of securities underlying unsponsored depositary receipts may be more limited than for sponsored depositary receipts. The values of depositary receipts may decline for a number of reasons relating to the issuers or sponsors of the depositary receipts, including, but not limited to, insolvency of the issuer or sponsor. Holders of depositary receipts may have limited or no rights to take action with respect to the underlying securities or to compel the issuer of the receipts to take action
Exchange Traded Fund Risk
When MFWM utilizes ETFs, clients will incur their pro rata share of the expenses of the ETF, such as investment advisory and other management expenses. In addition, clients will be subject to those risks affecting the ETF, including the effects of business and regulatory developments that affect ETFs or the investment company industry generally, as well as the possibility that the value of the underlying securities held by the ETF could decrease or the portfolio becomes illiquid. Also, ETFs may engage in investment strategies or invest in specific investments in which MFWM would not engage or invest directly.
ETF shares are listed for trading on a national securities exchange and are bought and sold on the secondary market at market prices. Although it is expected that the market price of an ETF share typically will approximate its net asset value (NAV), there may be times when the market price and the NAV differ significantly. Trading of ETF shares may be halted by the activation of individual or market-wide trading halts.
Please see Appendix B to our Investment Advisory Agreement for a discussion of additional risk associated with this strategy. A link to the Investment Advisory Agreement is provided at the bottom of this page.
Each Personal Portfolio is subject to an account minimum, which varies based on the strategies included in the portfolio. 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, and we may modify allocations within a client's account subject to the constraints of each client's current risk score and objective. Clients should be aware that their individual account results may not exactly match the performance of the Model Portfolios.