Q&A Series

Our ongoing Q&A series features Carillon Tower affiliate managers sharing their diverse investment philosophies and thoughts on the market.

Michael Stack, CFA Q&A with Michael Stack, CFA
Lead Portfolio Manager, Scout International Equity, Scout Investments

PHILOSOPHY: What does the Scout International team believe?

We believe that a portfolio of high-quality companies, purchased at attractive valuations, and held for the long term may outperform. High-quality characteristics we seek include: high return on equity (ROE), stable earnings earnings growth and low financial leverage. Our preferred valuation outlook for our companies includes both historical data of the holding as well as versus industry peers. Understanding the intrinsic value we assign a stock further helps us understand its growth potential.

Historically, a portfolio based on quality stocks has outperformed the overall index, as you can see in Figure 1. The MSCI EAFE Quality Index also did better than the MSCI EAFE® (Net) Index, which includes large- and mid-cap stocks across 21 Developed Market (DM) countries excluding the United States and Canada.


Outperformance of quality stocks
Outperformance of Quality Stocks

*Per the MSCI EAFE Quality Index Factsheet, the index was launched 7/12/2013. Data prior to the launch date is back-tested data (i.e. calculations of how the index might have performed over the time period had the index existed). There are frequently material differences between back-tested performance and actual results. Past performance - whether actual or back-tested - is no indication or guarantee of future performance. As of 3/31/2019 - Morningstar Direct.

PROCESS: How does your team choose stocks?

A fundamental research program supports the Scout International Equity team’s search for long-term ownership of quality companies with long-term growth tailwinds. The team uses a diversified, benchmark-aware strategy that invests in companies based on their fundamentals and quality characteristics while paying due consideration to the valuation.

PROSPECTS: Why invest internationally now?

Two big reasons: correlation and valuation.

Correlation — a measure of how different markets move relative to one another — has fallen to near-historic lows. A sharp decrease in overall market correlation between the S&P 500 Index and the MSCI EAFE® (Net) Index (see Figure 2) suggests markets are reacting to more specific internal variables than global trends. The potential rewards from an active manager’s strong stock selection become more apparent in a low-correlation environment.


Decrease in Correlation
Decrease in Correlation

Figure 2. As of March 31, 2019 – Source: Bloomberg


A valuation gap has emerged between the MSCI EAFE® (Net) Index and the S&P 500 Index since the global financial crisis. Domestic U.S. equities are now richly valued – some may say over-valued – while international equity valuations appear to be more reasonable. The gap that has emerged between the forward price-to-earnings ratios (see Figure 3) of the S&P 500 and the MSCI EAFE® (Net) Index may indicate that international equities are poised to outperform domestic equities.

Valuation Gap Emerging
Rolling Forward P/E Ratios
Valuation Gap Emerging Rolling Forward P/E Ratios

Figure 3. As of March 31, 2019 – Source: Bloomberg

How does Scout view emerging markets?

Our investments in emerging markets are no different than the rest of the portfolio – high quality. Emerging markets have the reputation of being a high-risk, high-reward portion of global markets. While that can be true in some cases, we look for the same quality characteristics in our emerging markets holdings as we do in our developed country holdings: high ROE, stable earnings growth, and low financial leverage.


STRATEGY Summary

The Scout International team seeks to outperform the MSCI EAFE Index over a full market cycle (three to five years) with less than commensurate risk. The team constructs diversified portfolios consisting of established companies domiciled outside the United States, or whose primary business is conducted outside the United States.

ABOUT Scout Investments

At Scout Investments, we are selective about everything we do. For more than three decades, our portfolio managers have actively managed a distinct suite of equity strategies with a focus on choosing quality investments. The firm’s thoughtful approach to asset management extends to the way we cultivate long-term client relationships and distribute our strategies via separate accounts, commingled funds and mutual funds.

To learn more about Scout Investments click here or contact us at 800.521.1195.




Disclosures:

Past performance is not indicative of future results. Investment return and principal value of an investment will fluctuate so that when redeemed, may be worth more or less than their original cost.

International investing presents specific risks, such as currency fluctuations, differences in financial accounting standards, and potential political and economic instability. These risks are further accentuated in emerging market countries, where risks can also include possible economic dependency on revenues from particular commodities or on international aid or development assistance, currency transfer restrictions, and liquidity risks related to lower trading volumes.

Growth companies are expected to increase their earnings at a certain rate. When these expectations are not met, investors may punish the stocks excessively, even if earnings showed an absolute increase. Growth company stocks also typically lack the dividend yield that can cushion stock prices in market downturns. The companies engaged in the technology industry are subject to fierce competition and their products and services may be subject to rapid obsolescence. The values of these companies tend to fluctuate sharply.

Graphs or other illustrations are provided for illustrative purposes only and not intended as a recommendation to buy or sell securities displaying similar characteristics.

 

Definitions:

MSCI EAFE® (Net) Index: The MSCI EAFE® (Net) Index measures the performance of performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada. The MSCI EAFE® (Net) Index subtracts any foreign taxes applicable to US citizens but not applicable to citizens in the overseas country. It is not possible to invest in an index.

MSCI ACWI: Comprised of stocks from both developed and emerging markets ACWI is an abbreviation for all country world index. It is not possible to invest an index.

S&P 500 Index: The S&P 500 measures the value of stocks of the 500 largest corporations by market capitalization listed on the New York Stock Exchange or Nasdaq Composite. It is not possible to invest in an index.