At Boston Partners, we embrace an approach developed in the 1980s for U.S. large-cap equities. Over the years, we have successfully adapted it across a wide range of market capitalizations, and we began applying it internationally in 2004. This broadened application reflects our belief that the time-tested approach used in the U.S. market applies equally well to a global universe of stocks.
Critical elements of stock selection
This belief is rooted in our conviction that, irrespective of where a company is headquartered, stock performance is driven by the same set of characteristics that make up the three critical elements of our stock selection: attractive valuations, strong business fundamentals, and a positive catalyst for change. Stocks selected for our equity portfolios must exhibit each of the following attributes:
- Low valuation, meaning that they must be cheaply or reasonably priced relative to the market
- Positive business momentum, or the ability to grow earnings
- Good business fundamentals with strong cash flow
This approach works, in our view, because in our experience low-valuation stocks have been shown to outperform higher-valuation stocks over time.1 Meanwhile, companies with strong fundamentals, such as high returns on invested capital, tend to outperform those with poor fundamentals. Stocks with positive business momentum resulting from improving trends or rising earnings generally outperform those with negative momentum.
Fundamental analysis is key
While macroeconomic factors such as falling currencies or monetary policy affect all markets, top-down approaches that incorporate such factors cannot identify the best long-term opportunities, in our view. We favor a bottom-up approach based on a repeatable process applied to each stock, without specific regard to industry sectors, currencies, geographic regions, or countries.
Small- and mid-cap flexibility
One distinct feature of our approach relative to many ex-U.S. equity funds is our flexibility to invest across the market capitalization spectrum, from small to mid to large caps. This creates a broader opportunity set than those available to peers focused primarily on large caps. Our approach to identifying bottom-up equity opportunities can result in the fund meaningfully varying its market cap exposure relative to its benchmark, the MSCI EAFE Index, which is designed to capture large- and mid-cap representation across ex-U.S. developed markets, but not small caps. In our view, small- and mid-cap ex-U.S. stocks make up a uniquely overlooked universe of opportunities where skilled investment managers can truly add value.
Identifying market dislocations
As a result of our unique process, we often do not follow the herd instincts of the broader market, which tends to react to news events and tries to predict earnings with near-perfect precision. Inevitably, something goes wrong, the broad market overreacts, and many companies’ share prices fall disproportionately to the issues that their businesses face. We believe that stocks exhibiting such dislocations between a company’s valuation and its business fundamentals offer the best potential to limit downside risk in falling markets while keeping pace in rising markets, and to generate long-term growth of capital.
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1 Boston Partners, 2018
The opinions expressed are those of Boston Partners as of May 2018 and are subject to change. No forecasts are guaranteed. This commentary is provided for informational purposes only and is not an endorsement of any security, mutual fund, sector, or index. John Hancock Funds, LLC, John Hancock Advisers, LLC, and their affiliates, employees, and clients may hold or trade the securities mentioned in this commentary. Past performance does not guarantee future results.
Diversification does not guarantee a profit or eliminate the risk of a loss.
Global investing, especially in emerging markets, has additional risks, such as currency and market volatility and political and social instability. Hedging and other strategic transactions may increase volatility and result in losses if not successful. Please see the funds’ prospectuses for additional risks.
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