International Value ADR Equity
The International Value ADR product seeks long-term capital appreciation by investing primarily in a diversified portfolio of equity securities of non-U.S. issuers of American Depository Receipts.
The firm operates an Investment Policy Group directed by our CIO and comprised of the portfolio managers, fundamental analysts, quantitative analyst, portfolio implementation manager and our President. The Investment Policy Group meets monthly to review macroeconomic trends, political trends and product portfolio structure, including regional and country allocations. The voting members are our CIO, portfolio managers, fundamental analysts and our President.
We begin our investment decision-making process with a universe of about 750 ADRs.
Using our proprietary valuation models--unique to each sector--we can reduce the universe of potential holdings to 250 ADRs based on financial strength. Our next analysis reviews liquidity, cash flow, leverage and earnings estimate revisions. This process lowers the number of potential portfolio holdings to 100 ADRs.
We then look for a value catalyst such as merger/acquisition, spin-off, restructuring and/or share repurchase activity. The in-depth portion of our process centers on solid qualitative research to identify those factors the will trigger significant improvement in a company’s fundamentals. We analyze trends in earnings growth, margins, operating cash flow, free cash flow and overall corporate direction. We consider for purchase only those stocks we’re confident will prosper.
The managers and analysts look for companies that have all or some of these attributes:
- Positive free cash flow.
- Corporate restructuring or management changes.
- Increasing market share or new product development.
- Inexpensive (i.e., low valuation) relative to their industry sector.
- Relatively flat or increasing earnings estimate revisions.
- Other evidence of positive catalysts for change
Analysts complete written reports on companies, including a section outlining Key Risks and Opportunities and Reasons to Own. The portfolio management group reviews the analysts’ work, agreeing on inclusion and exclusion from our portfolios.
Besides geographic diversification, we diversify across industry sectors and within sectors. We typically hold 50 to 55 securities to reduce company-specific risk. We seek to further reduce risk through a careful assessment of the quality of accounting, management and balance sheet.
What’s more, we maintain asset weightings in economic sectors that are within a reasonable range of our benchmark (MSCI World Ex USA) weights. These diversifying strategies allow us to lessen our spread exposure to company or industry surprises that are out of our control, while positioning for profitability.
While we do not have a firm rule on the maximum exposure to emerging markets, our portfolio has always had a less than 10% investment in these markets.