One of the most important aspects of manager due diligence is on-site visits with the investment teams we recommend. Sitting across from a team at a conference table and asking probing questions to the individuals responsible for investing your clients’ money yields invaluable insights that would otherwise be left uncovered. Certainly, since the era of Zoom began during the pandemic, video conferencing meetings have played their role. However, it still doesn’t compare to the ability to meet portfolio managers and analysts face-to-face. Senior Investment Analyst Monica Sengelmann and I recently had a chance to travel to London to meet with nine international developed and emerging markets teams across eight firms. Aside from gaining important information on the international and emerging markets strategies we cover, several interesting investment themes repeatedly came up during our on-site meetings.
Attention on artificial intelligence (AI)
The first common theme we heard about was the broadening number of beneficiaries of generative AI. At this point, we all are familiar with the U.S.-based companies that have been leading the market upward, such as Nvidia and Microsoft. These companies also come with a pretty high price tag. Nvidia’s stock, which has nearly doubled YTD, trades at roughly 80 times their trailing twelve-month earnings. International companies, conversely, make up a large part of the semiconductor supply chain whose earnings stand to benefit from the AI trend while also trading at substantial discounts relative to their U.S. counterparts. For example, Taiwan Semiconductor Manufacturing Co (TSMC) is a leading chip manufacturer with cutting-edge technology that is certainly aligned with the AI buildout. They project 20% sales growth this year while only trading at ~28 times earnings. Meanwhile, companies like Tokyo Electron (Japan) and ASML (Netherlands) are equipment manufacturers that will be critical to generative AI that likewise trade at more reasonable valuations. Companies aligned with the AI theme can also be surprising, like the Swiss company VAT Group, which produces vacuum valves critical to semiconductor manufacturing. VAT is up 20% YTD and is poised to continue to gain ground as they are the dominant company in the niche industry, producing a critical component for the process but making up less than 1% of the end cost of the semiconductor. Clearly, there is a broad set of companies throughout the semiconductor supply chain that will ultimately benefit from the generative AI investment cycle, and they are being uncovered by our recommended managers and integrated into their portfolios.
Growth in global GLP-1 drugs
Another hot topic of discussion was the opportunity for growth in global GLP-1 drugs, one of which is branded as Ozempic. Novo Nordisk, the producer of Ozempic, is a Danish pharmaceutical company that pioneered the use of GLP-1 to treat diabetes. It has also recently been approved as a weight loss drug. In the U.S. alone, there are between 60 and 70 million people who are categorized as obese. Novo is struggling to keep up with demand that many assess to be a total addressable market of $100 billion, which would make it the best-selling name-brand drug ever. Novo addresses this supply shortfall by buying Catalent, a US-based drug manufacturer. With the development of easier-to-maintain GLP-1 drugs (oral treatments versus the current offering of injectables) and increasing supply, Novo is well-positioned to capture the market and increase sales by multiples. Novo is one of the most commonly held stocks across the managers we cover, and it appears as though their earnings have a long runway of growth ahead.
Fresh eyes on Japanese equities
The last topic of interest in our discussions with managers in London was the rejuvenation of Japanese equity markets. On the back of economic promise and market reforms, Japanese equities have reached all-time highs not seen since 1989. Over the last one-year period ending March 31, 2024, Japan is among the best-performing developed market regions outside of the U.S., gaining 43%. While Yen weakness has curtailed those returns for U.S. investors, it has still been a phenomenal year. But what has driven those returns? The primary rationale we heard was renewed institutional investor interest due to market reforms by the Tokyo Stock Exchange (TSE). The TSE is pushing companies on their exchange to return cash on the balance sheet to shareholders, incorporate better corporate governance, and run more efficient businesses. Indeed, after many years of active managers finding a dearth of attractive stocks and being underweight to the country, many are now finding ample quality businesses there and are moving to an overweight position.
The power of diversification
These three themes represent just a smattering of the interesting tidbits we pieced together through our nine meetings in London, but were the most commonly mentioned and discussed. While U.S. returns have dominated global equities for quite some time, the narrowness of the U.S. rally is notable (Magnificent 7). International equities are more attractively valued and may have plenty of room to run. If pricey U.S. equities hit a speed bump, a well-diversified portfolio that includes a prudent allocation to international equities may help smooth the ride.
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