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Why, How and Now of Global Investing
November 20, 2017

When asked about our investment philosophy, we describe ourselves as strategic, global, value-oriented and active managers. Our time, energy and intellectual capital is focused on the allocation of the most appropriate asset classes and the selection of consistently superior managers to construct our portfolios. We have devoted 30+ years to managing capital with this underlying philosophy and continue to believe in its ability to deliver successful results for investor’s serious personal capital.

In the next three blog posts we will give a description of ‘Why’, ‘How’ and why ‘Now’ we are convicted in our global allocation philosophy and process. And why we believe the current environment is ever more conducive to investments outside the US.

Global Investing Philosophy (Why) - Global investing is one of the core tenants of our investment philosophy. It simply means investing in countries and companies across the globe. We do not limit our investment opportunity set to US based companies. We have an underlying bias to US investments. The bias is based on being US citizens, the large investment opportunity in publicly traded securities in the US, the long standing strength of the US economy, the entrepreneurial spirit and business expertise of US enterprises, a focus on shareholder value in US companies, and, maybe most important, US rule of law.

In spite of our US bias, we have been global investors from our early career days. It has been apparent to us that capitalism and democracy have been working their ways into the fabric of the globe’s economic, political and social systems for the last 50+ years. The technology revolution, in particular the smart phone and internet have sped this process up in the last 20 years. This is fostering a global middle class, creating a more entrepreneurial and sophisticated global work force, more interconnected global capital markets, protection of capital through improved rule of law and an expanding percentage of investment opportunities outside the US.

It has been estimated by the World Bank that extreme levels of extreme poverty across the globe were 40% in 1981. As of 2013, their estimates reflect this has shrunk to 10%!

The growing global middleclass is one of the most significant events happening in the world today. It will change economies, political structures and markets for decades to come. You cannot fight the inevitability of demographics. In the US you cannot deny the effects of the baby-boomer generation (70M people). The millennials (90M people) will be a next big demographic wave in the US. However, they both pale in comparison to the rising global middle class of 2 billion!

There is a logistic function called the Sigmund function, otherwise known as the S-Curve. It was popularized by Pierre Francois Verhulst in the 19th century. He theorized that population growth follows a certain S-curve. It grows at a steady state until it hits a certain point where it grows exponentially. This exponential growth sustains until the system hits a saturation point where it slows and eventually stops. The same function has been applied to technology innovation, the biological sciences, market adoption, etc. (Macro Intelligence Report)

What happens if you apply the S-Curve to per-capita income and the growing middle class? From 1970 to 2000 there was a relatively stable 700 million people going through the tipping point of the population/per-capita income S-Curve. In the next 15 years, some estimates have 4 billion people going through the same tipping point to middle class status. This is an exponential growth in the standard of living on a broad scale unlike anything we have experienced before.

A significant part of this change will occur in the East. Estimates have almost 90% of this growth in China and India. One billion Chinese, Indians and other Asians could attain a growing middleclass status in the next 15 years!

Since 1969, first based on the MSCI World Index from ’69 - ‘87 and the MSCI All Country World Index thereafter, the US equity markets have averaged approximately 50% of the globe’s equity market capitalization. It reached a high of approximately 65% in the early 1970’s and a low of 29% in the late 1980’s during the Japanese market peak. Since its most recent peak in the early 2000’s, US stocks have averaged below 50% of the world’s stock market capitalization. Our intuition tells us as the globe’s middle class rises, the wealth of foreign companies and markets will expand faster than their US equivalent.

An all or nothing approach to investing; e.g. 100% in the market or 100% in cash, has never resonated with us. This requires omniscient timing skills. For diversification purposes and because of the large opportunity set, being 100% in either US or international equities seems imprudent. From our early days admiring the investment returns of John Templeton and other pioneers in global investing, we have been convinced global equity allocations are a strategic, prudent and profitable philosophy in accumulating and preserving long-term wealth.

Look for our process in the next blog post…

 

Views expressed are not necessarily those of Raymond James & Associates and are subject to change without notice. Information contained herein was received from sources believed to be reliable, but accuracy is not guaranteed. Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security. Past performance is not indicative of future results. There is no assurance these trends will continue or that forecasts mentioned will occur. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. The process of rebalancing may carry tax consequences. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. The MSCI World Index is designed to measure the equity market performance of developed markets. It tracks 23 countries including the United States. Past performance may not be indicative of future results. It is not possible to invest directly in an index.

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