Using Both Fundamentals and Momentum
02/26/2009 9:14 am EST
Cynthia Tusan, president of Strategic Global Advisors-a woman-owned asset management firm-discusses her approach to global investing.
Q. Cynthia, your stated strategy is a fundamental, bottom-up approach, focusing on international companies. With that in mind, which are the three most important criteria that you use to determine whether a company's stock has the right stuff?
A. Our approach is both fundamental and quantitative, but we focus mainly on company-specific factors. Over the years we have consistently focused on four areas: valuation, growth, quality, and sentiment. For 2008, we were more active in looking at debt levels of companies and price momentum.
Debt levels were important in making sure that our portfolios could weather this economic storm. Price momentum was important in keeping an eye on companies that may have had problems that were not uncovered. Yet price sometimes is the only thing we have to go by when the environment is changing rapidly. According to some analyses already published, price momentum was indeed an important predictor for 2008 and valuation was not enough, and in some cases was a trap for investors.
Q. How much importance do you give to industry or sector analysis?
A. Industry and sector were important for 2008. [Industries that had] strong cash flow, even if growth prospects were not great, did well. Utility stocks, for example, and telecom stocks were safer havens.
Q. What additional criteria, such as country risk factors, do you take into account when looking at international stocks?
A. Political factors are always important in international investing. We tend to avoid countries that have unstable governments such as Thailand.
Q. For individual investors, what would you suggest is the best approach to international investing-individual stocks on foreign exchanges (where available), American Depository Receipts (ADRs), exchange traded funds (ETFs), or mutual funds? And why?
A. Individual investors may not have a choice, since most brokers do not offer retail investors the ability to buy stocks on their local exchanges. ADRs are a good alternative, as long as investors realize that they tend to have more emerging markets in that universe, and they should avoid inadvertently tilting towards emerging markets (unless that is their plan). ETFs are also a good alternative, but can be overwhelming since choices there are numerous. We have an ADR product that is available on the Schwab platform and a country allocation product that utilizes ETFs for retail investors.
Q. How do you find potential stocks?
A. We have developed a methodology to rank stocks across 14 factors. They are ranked amongst their industry peers and we try to own the best names within their industry or peer group. We use research from a variety of top tier global research firms including Merrill Lynch, Goldman Sachs, and Citigroup.
Q. How were your client returns in 2008? Would you have done anything differently, in hindsight?
A. Our performance was close to our benchmark, which was a success for us. (Editor's Note: Three of the four international funds run by Strategic Global Advisors trailed their MSCI benchmarks slightly, while its International Country Allocation Equity fund outperformed.)
Typically in these types of irrational markets one can get into value traps. We were able to avoid being adversely impacted in a substantial way by maintaining our discipline and stepping up our risk control. For example, it might be tempting to avoid financial stocks, but financial stocks can be the best performers when coming out of a bear market. Since we do not know yet where the bottom is, it is important to keep your financials, but be prudent and diversified in what you own.
Editor's Note: Following are the top holdings (as of December 31, 2008) in each of the SGA portfolios noted below:
International Large Cap Core, primarily stocks traded on foreign exchanges: Royal Dutch Shell (LSE: RDSA.L), Total (Paris: FP.PA), Reckitt Benckiser Group (LSE: RB.L)
International Small-Mid Cap Core, primarily stocks traded on foreign exchanges: Hokuhoku Financial Group (Tokyo: 8377), SES (Lux.SE: SESG), Nippon Soda (Tokyo: 4041)