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Fishing in Bigger Ponds

February 22, 2021 | Global Equity


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Company-specific factors, including what we call “sustainable value creation,” are increasingly more important than country-specific factors, and companies that deliver strong sustainable value creation are increasingly found outside the United States.

Quality Drives Returns

While the United States should continue to provide opportunities for high-quality growth-stock investing, the universe of high-quality growth stocks outside the United States is large and growing, and this is important because quality—specifically, what we call sustainable value creation—is a far more significant contributor to equity returns than other factors, such as geography.

Our analysis indicates that while country-specific factors have historically had a nearly 30% impact on investment returns, the importance of country-specified factors on investment returns has declined over time, and company-specific factors have emerged as the dominant component of investment returns. The chart below illustrates.

Among those company-specific factors are sustainable value-creation characteristics, such as industry-leading ROIC and sustainable competitive advantages. We believe portfolios constructed with meaningful allocations to companies that exhibit strong, sustainable value-creation characteristics have the potential to generate strong absolute and relative returns as well as superior risk-adjusted performance.

We believe portfolios constructed with meaningful allocations to companies that exhibit strong, sustainable value-creation characteristics have the potential to generate strong absolute and relative returns as well as superior risk-adjusted performance.

More Opportunities Abroad

Increasingly, these companies can be found outside the United States, as the chart below illustrates. The evolution of professionalization and innovation abroad has led to a material increase in the number of sustainable value creators in both developed and emerging markets.

For example, we find pharmaceuticals, luxury, and renewables to be industries with high exposure to companies with strong sustainable value creation characteristics.

The evolution of professionalization and innovation abroad has led to a material increase in the number of sustainable value creators in both developed and emerging markets.

Interestingly, our analysis shows that the total market capitalization of pharmaceutical companies outside the United States is nearly two times the size that it is inside the United States.

The disparity in luxury and renewables is even more remarkable: the non-U.S. luxury goods universe is seven times the size of the U.S. universe, and the non-U.S. renewable energy universe is six times the size of the U.S. universe.

In short, we believe investors increase their potential to earn superior risk-adjusted returns by fishing in ponds that are teeming with creators of high sustainable value—and those ponds increasingly include companies outside the United States

Three Pillars of International Investing Series
Part 1: Three Pillars of International Investing
Part 3: A Changing Tide Favors Non-U.S. Stocks
Part 4: Disruptive Business Models Drive Growth Abroad

Alaina Anderson, CFA, partner, is a portfolio manager and research analyst on William Blair's Global Equity team.

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