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By Jason Stipp | 03-23-2013 01:30 PM

Smarter International Investing

Morningstar's Patty Oey and Dan Rohr and Columbia Acorn's Andreas Waldburg-Wolfegg offer best practices for globe-trotting investors who must navigate choppy waters in today's market.

The following is a replay from the 2013 Morningstar Individual Investor Conference.

Jason Stipp: Hello and welcome back to Morningstar's Individual Investor Conference. We’ll be talking about international topics in this panel. This is our panel: Smarter International Investing. We’ll be covering things on diversification, potential areas of opportunity around the globe, and, of course, the hot topics of China and Europe, we'll get some great insights on where there might be opportunities in some of these areas.

A quick reminder along the way, we will be monitoring your questions. We'll try to take as many of those questions as we can. There is, to the right of your viewer, a place where you can submit questions for our panelists, so please do take advantage of that, and we'll keep an eye out for all of your queries.

I'm pleased today to be joined by three expert panelists. To my immediate left is Andreas Waldburg-Wolfegg; he is a portfolio manager at Columbia Wanger Asset Management, where he manages the Columbia Acorn European fund. Thanks for joining us, Andreas. Patty Oey, a senior fund analyst in Morningstar's passive funds research group. Patty covers primarily international equity exchange-traded funds. She joined Morningstar in 2007. Patty, thanks for being here. Dan Rohr, CFA, is a sector strategist for Morningstar, where his research responsibilities include industrial commodities in the Chinese economy. He also covers mining and timberland companies, and joined Morningstar also in 2007. Dan, thanks for being here.

Dan Rohr: Thanks

All right, so let's start off with a few general questions. I think broadly when investors are looking to go overseas--and we've seen them increasingly doing that, we've seen a lot of folks leaving U.S. equities, moving into fixed income, but also going overseas--they are looking for some kind of diversification. They feel like exposure to international economies will give them something extra for their portfolio. So, Patty, I'd like to start with you.

During the market crisis, correlations all seemed to rise, right? So, everything was moving in lockstep. With the market and equities seeming to move in the same direction on every bit of news, what correlation trends have we seen recently? Are you really getting differently correlated assets when you go overseas?

Patricia Oey: Well, I mean, since 2008, actually more recently like last year, we’re starting to see the different international markets kind of decouple a little bit. Emerging markets didn’t do as well last year and into this year they’re still not doing well. The U.S. is rallying. Leading into the financial crisis, one of the things that drove the diversification effects of like a broad foreign large-blend fund was actually the fact that Japan was doing poorly. So Japan was doing poorly for about two decades, and actually that was kind of the driver for diversification, for a U.S- equity-dominated portfolio. And because different countries, there are different things going on--right now Japan is doing better; emerging markets are still doing poorly. When there is a huge global risk on kind of a global crisis, yeah, we will see everything kind of correlate. But as we’re kind of coming out of this, we’re seeing correlations go down.

Stipp: Andreas, you invest in an area of the world where there has been a lot of attention, obviously, in the eurozone. Just in the [recent weeks], of course, Cyprus has been in the headlines, and we’re seeing markets globally respond to the small island nation. But you’re a fundamental investor; you’re bottom-up investor. So when you're looking at the companies in your portfolio, are you seeing them move in lockstep on these macro issues, or is the market starting to discriminate based on the fundamentals that you look for when you're investing?

Andreas Waldburg-Wolfegg: Just subjectively speaking, I think that they do react, of course, to these macro worries. The world continues to be worried about the stability of the eurozone, and whatever flares up in that story will always affect all stocks more or less at the same time.

Stipp: Are you noticing that you have to be more patient with your portfolio holdings? So you have a value that you expect these holdings are worth.

Waldburg-Wolfegg: Yes.

Stipp: The market’s moving up and down on some macro headlines. Do you have to really ride through a lot of that volatility, tune it out?

Waldburg-Wolfegg: Yes. Of course, like on a stock-picking level, that’s exactly what you need to do. You need to look at the company per se. You need to get really comfortable with what drives the company's earnings. Once you have that, then I think what is happening in the market overall is easier to tune out. 

Stipp: Dan, you cover basic materials stocks and commodities stocks. Are you seeing the market discriminating based on the value of those companies, like you expect they would? Or are you seeing that, just in that sector, a lot of stocks moving in lockstep?

Dan Rohr: Yeah, in basic materials you don't have the option of being macro-agnostic. Covering mining companies, I could get everything right with respect to these companies on the production side, with respect to their unit costs. But if I’m, say, directionally wrong on China, it’s not going to matter a darn bit. By virtue of that fact, I spend a fair amount of time looking at China.

As far as how these companies respond, when markets are improving, when markets are deteriorating, you are going to see some discrimination, principally centered around what their unit costs are looking like. So for some folks, a 30% fall in the price of iron ore constitutes an existential threat, whereas for others it simply means lower profits.

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