Q&A with Brandes: Why Look for Opportunities Overseas?

Matthew Johnson is the Director, Private Client Sales, at Brandes Investment Partners, L.P. His responsibilities include sales management, product distribution and business development, as well as developing the strategy and planning and executing the firm’s field sales efforts. He joined Brandes in 1993.

Jeffrey Germain, CFA, is a Director, Investments Group, at Brandes Investment Partners, L.P. His responsibilities include serving as an analyst on the basic materials research team and as a member of the International Large-Cap Investment Committee. His experience began in 2001 when he joined Brandes Investment Partners.

I spoke with Matthew and Jeffrey on June 20, 2019

Let’s start with some background on Brandes and your overall view of the international markets.

Matthew Johnson: Brandes is a Graham & Dodd value manager. We were founded in 1974 in San Diego, California. As a firm, Brandes has been investing in international markets for about a half-century or so.

With the S&P 500 tripling over the last decade and significantly outperforming markets around the world, investors seem to have lost interest in international investing. Given this sentiment, we think it’s important to revisit the concept of diversification. The case for making an allocation to international markets today is particularly strong given the valuation discount in international markets we are seeing versus the U.S.1

With respect to diversification, are you trying to make the case that U.S. equity investors are not properly diversified regionally?

Jeffrey Germain: I think it’s important to first set the stage with where the U.S. based investor is allocated regionally. We should then explore the issues of whether such an allocation is prudent from a diversification standpoint and if it leaves room to grow the international allocation.

At the end of 2018, the equity allocation for a typical U.S. investor was 70% in the U.S. and only 30% in international markets.2 If you consider this allocation in the context of where most of the world’s gross domestic product (GDP) is being generated, it does not seem properly balanced. International markets actually represent 85% of global GDP, with the U.S. comprising the remaining 15%.3 The international equity markets also offer a fuller opportunity set as a significantly higher percentage of large-cap companies are domiciled in markets outside the U.S.4

So yes, more GDP is generated outside the U.S. and the opportunity set is larger, but, are the companies domiciled outside of the U.S. ones I want to invest in? Are these companies I would recognize? We believe the answer to both questions is yes. The international marketplace is home to many businesses with powerful brands that are well known. As an example, just under half of the 2018 Top 100 Most Valuable Brands are represented by non-U.S. companies. Also, of the brands that represented the 2018 Top 20 Risers, more than half are from non-U.S. companies.5

To sum it up, in our view and at a high level, a 70% allocation to U.S. equities does not appropriately consider the economic realities of today’s world and likely reflects a home country bias.