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Overview
Overview

The Morgan Stanley International Equity Strategy invests in a diversified portfolio of high quality compounders and value opportunities, primarily in developed markets outside the US. The compounders are characterized by high returns on operating capital employed and strong free cash flow. The value opportunities tend to be more cyclical, with improving or mispriced fundamentals. The overall mix between compounders and value opportunities varies as valuations and prospects change. The Strategy seeks to provide superior returns over the long term by providing attractive absolute returns in rising markets and helping to reduce downside participation in challenging markets.

Differentiators
1
Patience Is a Virtue

A genuine long-term investment process that takes advantage of any pricing anomalies versus a stock's long-term fair value. This long-term horizon allows investors to benefit from the value creation inherent in these companies.

2
A Sense of Perspective

Trying to beat the market every year is futile. We understand that what matters is capital preservation, particularly in tough years when our clients need performance the most.

3
A Balance Based on Price and Prospects

Our genuine long-term view and focus on price gives us the flexibility to exploit both high-quality and value opportunities in a time proven process.

4
A Strong Heritage

Highly experienced managers with an investment philosophy stretching back three decades. 

Investment Approach

The International Equity Strategy looks to generate attractive long-term performance by investing in two types of companies, attractively priced High-Quality Compounders, companies that have the ability to generate sustainably high returns on operating capital employed (ROOCE), and Value Opportunities which are more cyclical companies with reasonable and/or improving fundamentals that are trading at a sufficient margin of safety to compensate for their greater risk. The team believes that a portfolio consisting of both types of stocks, with the flexibility to adjust the mix dependent on valuation and prospects, has the potential to generate attractive long-term returns for investors.

The mix between High-Quality Compounders and Value Opportunities is not a top-down allocation and will vary across the market cycle depending on valuation and perceived prospects. However, the Strategy has typically maintained an overweight to quality companies given their potential for long-term compounding and overall contribution to the Strategy's long-term pattern of asymmetric returns.

The team believes that losing money is worse than missing the chance to make it. The team further believes that benchmarks are inherently risky and does not attempt to manage tracking error. Rather than relative risk, the team's primary concern is absolute risk - the permanent loss of capital. In keeping with the team's emphasis on bottom-up stock selection, risk is assessed at the stock level by evaluating company fundamentals, financials, management, price and what could go wrong. The team uses free cash flows over reported earnings to assess valuation.

Investment Process

1
Screening Universe

Assessment of Starting Point and Liquidity
(Free Float > $2Bn)

High-Quality Compounders

  • Have high returns been sustained?
  • Is valuation fair value or better?

Value Opportunities

  • Do price or price movements look interesting?
  • Do returns look reasonable or unusually depressed?
2
Kicking the Tires

Assess Potential Stock Candidate - High-Quality Compounder, Value Opportunity or Value Trap?

  • Engine of returns and profitability
  • Direction of returns
  • Market shares and distinct competitive advantages
  • Degree of cyclicality and capital intensity
  • Financial strength

Threats & opportunities for sustainable returns

  • Industry dynamics
  • Company developments
  • Material ESG factors

Management

  • Response to potential threats & opportunities
  • Incentives
  • Capital Allocation
3
Value
  • A focus on free cash flow (FCF), not accounting numbers
  • FCF yield and other measures such as P/E, ROE, P/B, DCF, EV/NOPAT where relevant
4
Construct
  • Does new idea have a better risk / reward trade-off?
  • Weights influenced by absolute level of risk and team’s level of conviction
  • Compounders tend to have larger positions – lower absolute risk
  • 5% max security weight
  • No country or sector limits

Portfolio Managers

Team members may be subject to change at any time without notice. The investment team currently has 15 members; information on additional team members can be found on MSIM.com.

Team Insights

RISK CONSIDERATIONS  

Past performance is not a guarantee of future performance. There can be no assurance that the Strategy will achieve its investment objectives. Portfolios are subject to market risk, which is the possibility that the value of the investments and the income from them can go down as well as up and an investor may not get back the amount invested. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events. Accordingly, you can lose money investing in this strategy. Please be aware that this strategy may be subject to certain additional risks. In general, equities securities’ values also fluctuate in response to activities specific to a company. Investments in small- and medium-capitalization companies tend to be more volatile and less liquid than those of larger, more established, companies. Investments in foreign marketsentail special risks such as currency, political, economic, market and liquidity risks. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed countries. Derivative instruments can be illiquid, may disproportionately increase losses and may have a potentially large negative impact on the portfolio’s performance. Illiquid securitiesmay be more difficult to sell and value than publicly traded securities (liquidity risk). ESG strategies that incorporate impact investing and/or Environmental, Social and Governance (ESG) factors could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. As a result, there is no assurance ESG strategies could result in more favorable investment performance.

This communication is only intended for and will be only distributed to persons resident in jurisdictions where such distribution or availability would not be contrary to local laws or regulations.

There is no guarantee that any investment strategy will work under all market conditions, and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. Past performance is no guarantee of future results.

A separately managed account may not be appropriate for all investors. Separate accounts managed according to the Strategy include a number of securities and will not necessarily track the performance of any index. Please consider the investment objectives, risks and fees of the Strategy carefully before investing. A minimum asset level is required. For important information about the investment manager, please refer to Form ADV Part 2.

Any views and opinions provided are those of the portfolio management team and are subject to change at any time due to market or economic conditions and may not necessarily come to pass. Furthermore, the views will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring. The views expressed do not reflect the opinions of all portfolio managers at Morgan Stanley Investment Management (MSIM) or the views of the firm as a whole, and may not be reflected in all the strategies and products that the Firm offers.

All information, which is not impartial, is provided for informational and educational purposes only and should not be deemed as a recommendation. The information herein has not been based on a consideration of any individual investor circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To that end, investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.

DEFINITIONS

Return On Operating Capital Employed (ROOCE) is a ratio indicating the efficiency and profitability of a company’s trade working capital. Calculated as: earnings before interest and taxes/property, plant and equipment plus trade working capital (ex-financials and excluding goodwill).

Free cash flow (FCF) is operating cash flows (net income plus amortization and depreciation) minus capital expenditures and dividends.

OTHER CONSIDERATIONS

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the international equity market performance of developed markets, excluding the U.S. & Canada. The term "free float" represents the  portion of shares outstanding that are deemed to be available for purchase in the public equity markets by investors. The MSCI EAFE Index currently consists of 21 developed market country indices. The performance of the Index is listed in U.S. dollars and assumes reinvestment of net dividends. The index is unmanaged and does not include any expenses, fees or sales charges. It is not possible to invest directly in an index. Any index referred to herein is the intellectual property (including registered trademarks) of the applicable licensor. Any product based on an index is in no way sponsored, endorsed, sold or promoted by the applicable licensor, and it shall not have any liability with respect thereto.

The information presented represents how the portfolio management team generally implements its investment process under normal market conditions. Investment team members may change from time to time without notice.