How to look for investing opportunities abroad
Europe, Japan, Africa – experienced portfolio managers look for businesses that have room to grow
By: TERRY CAIN
Date: October 15,2014
The recent drop in the Canadian stock market may have some investors wondering whether they should dabble in international markets. Unless they already have plenty of exposure to foreign markets, that is probably a good idea. After all, Canada represents only 4 per cent of the world’s stock market capitalization – why put most of their eggs in such a small basket?
The U.S. market is the obvious first place to look. But American stocks are the world’s most expensive in terms of the trading price compared with the profit the companies generate. As well, the U.S. market tends to move closely with the Canadian market – making it a less effective way to diversify a portfolio.
So that leaves the rest of the world. And as one might expect, there are no shortage of opportunities to be found if one knows where to look – and how to look.
Jed Weiss, a portfolio manager at Fidelity Investments, currently manages the Fidelity International Growth Fund for Canadian investors and a number of funds for U.S. investors. He says his “sweet spot” is buying shares of companies that feature “multi-year structural growth.”
These companies are typically in businesses that feature high barriers to entry – that is, significant obstacles for new companies to make their mark, Mr. Weiss explains. He buys those companies at attractive valuations. “I want to buy growth, but not at any price.”
Mr. Weiss uses three main methods to find these companies. The first is what he calls “structurally attractive multi-year growth themes.” Simply put, that means business sectors that are growing at a strong rate, and expect to keep doing so.
An example he gives is pet pharma – drugs and health-care products for animals. “Spending in this area is going up steadily, there aren’t many companies in the space, it touches consumers in many different parts of the world, and it’s a segment that tends to be overlooked by investors.”
Mr. Weiss refers to his second area as “cyclically out-of-favour oligopolies.” That is, overlooked industries where a very small number of countries account for most of the sales. The example he gives is semi-conductor lithography – making the machines that make microchips and other computer components. Dutch company ASML Holding is the global market leader in this category.
The third method Mr. Weiss uses is looking for opportunities following large-scale shocks affecting a certain industry or country.
So where in the world do Mr. Weiss’s methods lead him to invest? The answer changes from year to year – and sometimes month to month.
“From about May, 2010 until late 2012, Europe was the gift that kept on giving,” Mr. Weiss says. “It was a solid strategy to buy quality companies in ‘scary-sounding’ countries.”
He points to Portugal, Italy and Greece – countries that went through debt crises. He is now finding opportunities in countries that are tied to Germany and the Nordic countries. Specifically, he is referring to countries such as the Netherlands, Belgium, Denmark and Sweden. He has found companies there that he likes in businesses ranging from light fixtures to banking to household paint.
Fidelity’s Mr. Weiss sees some great opportunities in Japan. “Small-cap Japan is one of the great buying anomalies of our time,” he says. Mr. Weiss calls it a “very cheap and inefficient market” that may be boosted by Mr. Abe’s ongoing reform program.
Mr. Weiss also finds companies to buy in emerging markets. He points to the Mexican housing market. He notes that some of the companies in the sector went bankrupt so the remaining ones are in a strong position as the market improves.
Another case is mobile communications companies in Africa, where there is a huge market without traditional infrastructure. “You just can’t find opportunities like that in established markets like North America,” Mr. Weiss says.