" When a man has put a limit on what he will do, he has put a limit on what he can do."
– Charles M. Schwab
From Causeway's inception in 2001, we embraced global equity as an alternative to the constrained international equity mandates requested by the vast majority of our clients. We recognized the benefits of screening globally for undervaluation among the world's best-run companies. The developed global investable universe is comprised of over twice the number of companies in the developed international universe. As a result, global has the potential to deliver significant performance advantages versus international. However, when we first launched global value equity over 12 years ago, we did not fully anticipate the potential of investing in global versus international developed markets. Although more efficient, on average, than its foreign peers, the US equity market invariably offers opportunities to exploit mispricing. The breadth and depth of the US equity market lends itself well to a developed markets portfolio without geographic limits. Unlike a dedicated US equity portfolio, a global portfolio may hold varying amounts of US-listed stocks. From a bottom-up perspective, we compare the risk-adjusted total return potential of the US-listed stocks to non-US alternatives. If given the choice, we prefer global equity mandates over international for their flexibility and their greater number of potential investment candidates.
The arguments for separating US and non-US equities typically revolve around a misguided notion of diversification. Today, many US-domiciled investors still think of their US equities as "core," and international equities as something different, unrelated to the US market. We argue just the opposite. High (and increasing) correlations of US and non-US equity returns imply that global factors eclipse local factors in driving developed market returns. Over the past 20 years, we have observed that industry-specific valuation differences in the developed markets have narrowed – and often vanished – across borders. Multi-national and/or exporting companies in the same industry, regardless of geographic domicile, share similar opportunities for growth. Efforts by investors to partition US from non-US developed markets also stemmed from a notion of specialization. How could an expert in non-US developed markets also succeed in the US market – and vice versa? Yet, we note, if research analysts do not span the globe, how can they ever understand fully their industries and the competitive environment? We believe that our analysis must compare political, regulatory and social changes impacting companies in one country/ region, and weigh the possible contagions to other regions.
To explore this comparison of global versus international, we spoke to Causeway fundamental and quantitative portfolio managers, Jamie Doyle and Joe Gubler Jamie and Joe, what evidence do you have in favor of giving an asset manager geographic discretion?
JD: I always start with Causeway's own track record. Our global value equity strategy has delivered an annualized 12%, net of fees, and returned 4.5% in excess of the MSCI World Index (to 12/31/13). This compares favorably with Causeway's international value equity strategy, which does not invest in the US, with an average annual return since inception of 9.4% and alpha of 3.1% versus the MSCI EAFE Index. For a bigger picture, we compared a universe of global portfolios to their international and US peers. The comparison corroborated our own positive experience with global equity.