Foreign stock markets have lagged the U.S. performance in recent years, and many experts say now is a good time to invest in equities overseas.
Alaina Anderson does just that as co-portfolio manager for William Blair’s International Leaders Fund (WILNX).
It’s a large-cap growth fund. Among the major market themes attracting Anderson’s attention now are the transition to clean energy, signs of renewed growth in China, and opportunities among consumer-staple stocks.
She’s not so keen on companies fueled by acquisitions.
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The International Leaders Fund has generated annualized returns of 16.18% for the past year, 5.14% for the past three years, 3.95% for the past five years and 6.89% for the last 10 years, according to Morningstar.
TheStreet recently chatted with Anderson about foreign investing, and here’s what she had to say, including stock picks.
TheStreet.com: What’s your outlook for foreign stocks in general over the next year?
Anderson: We are constructive. The environment favors breadth over concentration. The U.S. market’s leadership is concentrated in information technology. We see leadership in more sectors overseas, including industrials.
There is more breadth and valuations are more attractive outside the U.S. Until recently, there was pessimism around foreign developed markets. Now we’re seeing the market may have been overly pessimistic.
TheStreet.com: What’s your investment philosophy?
Anderson: We’re bottom-up, fundamental investors, with macro considerations. We look for high-quality growth investments. Strong corporate performance is a driver of superior investment returns. Durable market leadership with competitive advantages is important.
William Blair
TheStreet.com: What investment themes do you find most attractive now?
Anderson: The transition to clean energy is a growth megatrend. Countries are committed, the cost of technology is declining, and there’s a need to decarbonize. Industrials, tech companies and utilities are enablers of the energy transition.
The reopening of China is another theme. The covid shutdown was tough for China and international companies. Now we are seeing some green shoots in China, such as consumption and travel.
Also, we are interested in areas affected by the U.S.-China conflict. We’re looking for companies in sectors where the U.S. has put up a ring fence. That includes health care, aerospace and defense, and technology, including semiconductors.
Another area we like is staples. Consumers are feeling some pressure. They are trading down for value, [seeking cheaper items]. Inflation pressure is pinching them. We like companies that can meet consumers where they’re at, but with brands strong enough that they can pass through inflation.
Growth investors don’t traverse a lot in staples. Where you can get single-digit volume growth plus inflation, you have a high-single-digit top line. If you can hold or increase margins, you can get double-digit total shareholder return.
TheStreet.com: What investment themes do you find least attractive now?
Anderson: Where growth is acquisition driven. After the Great Financial Crisis [2007-09], high-quality growth companies used cheap capital to acquire growth. [With interest rates having soared,] that has gotten expensive. So we’re cautious about companies that have grown through acquiring.
Another area is long duration cash-flow companies, where cash flow from operations don’t cover capital expenses. It includes innovation technology companies whose earnings are low to nil. It’s a problem when there’s low [profit] visibility and high valuations.
TheStreet.com: Can you talk about two of your favorite stocks?
Anderson: 1. Lululemon Athletica (LULU), the athleisure apparel company based in Canada. I talked about the pressure of consumers trading down. But this company is positioned at the higher, largely for women. The price for a pair of pants can be $100.
You might think they’re under siege from value-oriented consumers. But same-store revenue rose 16% [on a constant dollar basis] in the first quarter, and overall revenue grew 24%. They’ve had a meaningful acceleration in their greater China business and have expanded into golf and tennis.
They’re also getting traction in menswear. You would think they’d be hurt by macroeconomic headwinds, but the quality leadership is able to make its own weather.
2. HDFC Bank (HDB) in India. It’s the most dominant bank in India, with strong management and institutional processes. HDFC Bank is merging with HDFC Ltd., which specializes in mortgages.
Only 5% of HDFC Bank customers have a mortgage, and only 30% of HDFC Ltd. customers have bank accounts. So there are exciting cross-selling opportunities.
Privately run banks like HDFC are taking share from legacy, government-owned banks. The private banks can pick the sectors where they want to lend much better than the government banks. So the private banks have better quality loans. Also, HDFC’s scale can bring borrowing costs down.
So they have a strong fundamental advantage over their peers. Loan growth in India, as in many emerging markets, is very strong. HDFC is in the pole position to capture it.
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