Regardless of risk tolerance, diversification of an investment portfolio is paramount. At its core, the benefit that diversifying can provide is lower expected volatility of the portfolio at large. By investing across an array of asset classes and styles, investors dampen concentration. Concentration, if left unchecked, can prove troublesome should the portfolio’s dominant asset class, geography, or style fall upon a challenging environment. Even within broader asset classes such as equities, it is important to consider the correlation of the securities in the portfolio. Proper portfolio management should target more balanced risk exposures, and regardless of an investor’s country of domicile, this should include an allocation to international markets.
What to look for in foreign markets?
When weighing an allocation to the international space, key considerations should include a disciplined and unique investment process, localized knowledge, and experience managing through diverse market environments. History has shown that international markets are less efficient when compared to the U.S. market, which means that potential reward is amplified. With that in mind, we generally prefer international exposure that is actively managed as opposed to a foreign allocation that aims to track a broad benchmark. Still, a plethora of options are available to investors regardless of management preferences, and below we identify two of our favorites within each arena.
Active: GQG Partners International Opportunities Fund (GSIMX / GSINX)
Active managers set out with the objective to beat a benchmark that is broadly representative of the team’s underlying investment universe. At Blue Chip Partners, we are drawn to the GQG Partners International Opportunities Fund – not because of its top decile ranking relative to Morningstar peers, but more due to the unique stock selection process employed, a management team with deep expertise, and the fund’s emphasis on focus on forward-looking quality.
Led by Rajiv Jain, who has 25 years of international investment experience, the team behind GQG Partners International Opportunities Fund does not align with the traditional investment management mold. In fact, Jain intentionally targets inclusion of investment professionals that come from non-traditional backgrounds, which can help to foster a culture of debate and diverse insight as part of the investment process. Further, when conducting research on a company for potential inclusion in the portfolio, Jain will send a research analyst to the relevant country. Their goal: return with a well-developed case as to why the team should NOT invest in the company. Thus, the team is not simply a brigade of “yes” men and women, and this desire for a view into all aspects of a business embodies GQG’s deep, unique investment process.
In addition, the fund is not pigeonholed into a specific portion of the style box and will gravitate towards wherever the team identifies “forward-looking quality” – which is described as the compounding potential of a company over a full market cycle. Finally, we view the performance profile that Jain has developed as worth noting. To generate top decile performance, the fund actually has not outperformed the FTSE Global All Cap ex US Index in rising markets, indicated by an up capture ratio of ~99%. Where Jain and his team’s forward-looking quality has shined, however, is in down markets, in which the fund is only capturing ~70% of negative performance displayed by the international space.
A disciplined and unique investment process, deep expertise, and a track record of winning more by losing less makes the GQG Partners International Opportunities Fund our preferred allocation to international markets at the present time.
Passive: iShares MSCI International Quality Factor ETF (IQLT)
Contrary to active management, a passively managed investment vehicle aims to mimic the holdings and performance profile of a particular index. Passive exposure will generally come with a lower price tag than an actively managed allocation, as the management team is simply seeks to track a benchmark as opposed to outperform it.
Similar to the active fund discussed above and the Blue Chip Partners Core Equity Model managed internally, a passive allocation to the international space that emphasizes quality is our preference on this side of the table. Using an underlying index that identifies businesses with high return on equity, low leverage, and low earnings variability, the iShares MSCI International Quality Factor ETF at times has offered a stable performance profile relative to other passive options in international. Given the quality bias, IQLT exhibited a lower drawdown relative to the MSCI ACWI ex. USA Index during the negative performance periods in 2018 and 2020. Limiting drawdowns can have a meaningful impact on long-term performance, which is a philosophy we embody in our own internally managed equity allocations.