Foreign stocks have lagged their U.S. counterparts for the last 12 years. So by the law of financial cycles, foreign stocks should do better at some point.
No one knows when that might happen. But if you’re interested in foreign stocks, you might have a look at the Lazard International Quality Growth fund (OCMPX) -), which began in January 2019.
Related: Goldman Sachs fund manager makes the case for these 3 dividend stocks
Through Oct. 9, it had a one-year return of 17.12% and a three-year annualized return of 0.03%, according to Morningstar. Those numbers beat the cumulative returns posted by foreign large-cap growth funds covered by the firm and the Morningstar foreign growth stock index.
TheStreet recently chatted with the Lazard fund’s co-manager Barnaby Wilson to get his take on investing and stock picks.
The fund is a bottom-up investor, choosing stocks on their own merit, and is thus neutral on most industries and geographies. Wilson emphasizes the importance of investing in quality stocks – ones with strong fundamentals – as quality bests growth and value in global markets.
Here are Wilson’s comments, including his stock picks.
TheStreet: What is your investment philosophy?
Barnaby Wilson: We think great companies can make great investments. For us, great is a business that generates high financial productivity – return on capital, return on equity and cash flow return on investment. Also, there’s an ability and appetite to reinvest cash flows back into the business.
This combination of high financial productivity and reinvestment produces a compounding effect on cash flows, earnings and shareholder value. That’s historically undervalued by the market.
What makes some of these great companies great investments is the market’s tendency to assume that this compounding effect won’t last because of competitive pressures.
Some companies are better at resisting competition than others, and in doing so, they can beat the market. In short, our opportunity is driven by investing in companies that generate high financial productivity for longer than the marker expects.
Pricing and scale are critical advantages for many of our compounders. With scale, companies can manage utilization and retrain employees quickly. Also, reinvestment is solely focused on expanding their capabilities to give customers what they need.
Lazard Asset Management
TheStreet: What is the appeal of international large-cap growth stocks?
Barnaby Wilson: It’s important to make a distinction between growth and quality. As an investment style, quality doesn’t get nearly the attention of growth. Yet, quality has outperformed both value and growth in global markets for decades.
TheStreet: What geographies and industries are most appealing now?
Barnaby Wilson: Our portfolio’s geographic and industry exposure is an output of our bottom-up investment approach, and we invest in a wide range of geographies.
We tend to stay away from sectors with low financial productivity, such as utilities, energy and telecommunications. But we have invested in exceptional companies in a wide range of other sectors. As patient investors, we think more about the appeal of these industries and companies over the long term, rather than their appeal today.
TheStreet: What’s your view on developed markets and emerging markets?
Barnaby Wilson: As I said, we don’t invest based on a company’s domicile. However, our international quality growth strategy generally has been underweight emerging markets since the inception of the strategy in 2016. That means underweight compared to our MSCI ACWI ex-USA Index benchmark.
This isn’t reflective of a top-down view of emerging markets relative to developed. It’s about stock selection, as I mentioned.
TheStreet: Can you discuss two of your favorite stocks?
Barnaby Wilson: 1. Taiwan Semiconductor (TSM) -). It’s the world’s largest semiconductor foundry, manufacturing chips designed by other semiconductor companies. TSM has been able to maintain a cash flow return on investment (CFROI) around 15% for decades, well in excess of their cost of capital. That has produced significant profit for decades.
They have been able to maintain this high level of financial productivity with very strong competitive advantages, such as scale and regulatory barriers.
The company has continually reinvested its substantial cash flows. That has helped the company develop a strong scale (pricing) advantage. The continued advancement in semiconductor technology and their willingness to reinvest helps extend their competitive advantages.
2. Accenture (ACN) -), domiciled in Ireland. It’s the largest information technology (IT) services organization in the world, with over $60 billion of revenue. Accenture’s revenue growth has been driven by reinvestment and scale, enabling its early movement into growth areas of the market.
Their relationships and willingness to invest in and migrate over 700,000 employees to attack new opportunities also have driven growth.
Accenture’s CFROI has been over 25% for many years. That, coupled with modest asset growth, has generated substantial cash flow. Gross margins have trended higher, despite labor headwinds.
