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Scouting for Investments Abroad

Use this screen to find firms that add geographic diversification.

David Krempa, 12/01/2011

Because the focus is on China this issue, we thought it would be worthwhile to search for safe investments that can increase investors’ foreign exposure. Understandably, U.S. investors’ portfolios are often overconcentrated in domestic companies. Investors are much more familiar with U.S. companies, so it makes sense that they would gravitate toward the stocks they know. Exposure to foreign companies, however, helps diversify portfolios and gives investors exposure to fast-growing economies. Foreign companies are rarely highlighted in the U.S. financial media, so unless investors are actively searching for foreign investments, they are unlikely to come across new ideas.

Given the situation in Europe, many investors may be concerned about investing in foreign companies. Most large U.S. firms, however, already have significant European and international exposure, so investing in a foreign firm may not be as radical of a change as it seems. Also, Europe is a large part of the global ex-U.S. economy, but there are a number of other countries, including those in emerging markets, that have been producing strong growth and are in solid financial shape. We believe that investors with a long time horizon will do well by investing in attractively priced international firms that have competitive advantages, even if they are heavily dependent on Europe.

Foreign = Yes

Morningstar Principia does not have the option to screen by individual country, but it does allow us to limit our stock screen exclusively to firms that are based outside the United States. This screen will cut down our stock universe from more than 11,000 companies to around 2,200 stocks.

And Uncertainty = Low

Many investors are skittish about investing in foreign firms for a number of reasons. They’re less familiar with foreign economies, wary of foreign government regulations, and often wonder if the firm’s financial statements are reliable. These concerns have been especially heighted with the recent emergence of some fraudulent firms in China. For these reasons, we limited our screen to firms that our equity analysts have assigned a low uncertainty rating. Firms with low uncertainty tend to be larger, more established, less cyclical, and generally safer investments than those firms with high uncertainty. They are firms that we believe are the least susceptible to political instability. This may restrict us from getting home-run returns, but it will help protect our downside.

And Moat = Narrow or Wide

We also limited our search to companies that Morningstar has assigned a narrow or wide moat. The firm’s moat is an indication of the firm’s sustainable competitive advantage, meaning they are likely to keep competitors at bay.

David Krempa is an associate analyst with Morningstar.

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