In recent quarters, global stock markets have been volatile but have made little progress. In fact most stock indexes are either below or at the same level attained 18 months ago. If one were to separate global stock performance into regions, the worst performance has been in Europe (no surprise), while the best performance of the developed regions has been US stocks. Performance of developing countries such as Brazil, China and India has been somewhere in between. Our research suggests that this lack of performance in just about all markets is creating an opportunity for investors with a multi-year time horizon – yours truly. More importantly, the significant decline of shares outside the US – including Europe – are

becoming strikingly attractive as most of the “bad news” is already reflected in the depressed stock prices.

Baron Rothschild, an 18th century British nobleman, once said "the time to buy is when there’s blood in the streets." This is contrarian investing at its heart – the strongly held belief that the worse things seem in the market, the better the opportunities are for profit. Though one should be cautious as to the timing of such purchases during times when it looks like things can only get worse, history shows that purchasing shares after significant declines or long periods of lackluster performance can be very rewarding over the longer term. At some point markets bring stock values down so low that the worst case scenario is already reflected in the price and the value has no where to go but up. The most recent and well publicized case of such an event was in the spring of 2009 when global indexes had declined catastrophically and there was little news that things were going to get better anytime soon – as the Baron referred, there was “blood in the streets.” However, investors who held or bought shares from those levels performed dramatically over the ensuing year with many global indexes doubling in value!

Though US stocks have performed better than non-US stocks in recent quarters, there is better long term value in markets outside the US. For instance, there are a number of very high quality European companies trading at ridiculously low prices, relative to their value, earnings and global leadership. The same is true in the developing areas of the world such as Brazil and China. Though these economies have slowed recently, they are still growing multiples faster than the US and Europe and will most likely continue to do so for many years. These markets also offer investors an opportunity to buy great quality companies at very attractive prices. The relative valuation of non-US stocks is attractive and suggests that the best stock price performance over the next few years may be on foreign soil. Fortunately, we are global investors and are willing and able to carefully take advantage of these opportunities. However, how much exposure should a global investor have to non-US stocks?

The US makes up only 50% of the world’s stock market
Were you aware that the US stock market makes up only about 50 percent of the world’s publicly traded markets? That’s right. So to be a truly global investor and seize the opportunities outside US soil, investors must be willing to find and research great foreign companies to add to their portfolio – now more than ever. This is an ongoing process for our team and research partners. As you know, at any given time, your portfolio has been up to 35% invested in foreign stocks (unless your Investment Policy Statement suggests otherwise). Over the past four quarters, this amount was purposely reduced to avoid the subsequent decline – however we are now ready once again to increase foreign exposure.

The Morgan Stanley World Index – The Benchmark for Global Investors
Though many investors like to compare their equity performance to the S&P 500, it is simply the wrong benchmark for comparison to our work. As you may know, this widely quoted index only encompasses 500 of the largest companies in the US – there is no foreign stock exposure whatsoever. The appropriate index for any global investor such as us is the Morgan Stanley World Index. This index includes stocks from developed and emerging markets around the globe, of which about 50% are US based – an index more closely aligned with your portfolio and our team’s work.

Though there will be periods when one region of the world may outperform another – most recently the US – history and our research suggest that over time global investors will fair better in terms of total return and risk management.

We hope this quarterly update finds you well. If you would like get together to discuss your portfolio, or you have experienced any significant changes in your financial situation that we may be unaware of, please let us know at your earliest convenience.

Sincerely,

James E. Demmert
Managing Partner