1. Wider Horizons

    The Case for International Equities

    Stephen Corr, Client Service Director. First Quarter 2019
  2. More than ever, we find ourselves making the case for the defence of international equities. We have been asked to do this so often, we thought it worth sharing our thoughts more broadly.
  3. The ‘international’ asset class has grown in prominence in recent decades. Our own experience in managing such mandates dates back to the 1980s but investing overseas is more deeply embedded in our firm’s DNA. The Scottish Mortgage Investment Trust, founded in 1909 and managed by Baillie Gifford for 110 years, made one of its first investments in Malayan rubber plantations.

    As growth investors we’re optimistic by nature, and as such we start with what we see as the positives for international markets. Quite simply, the opportunity set for growth beyond the US market is expanding, while the US quoted market is shrinking.



    For the purposes of this report, we define our investible universe as stocks with a market capitalisation above $1 billion. The universe is summarised below.

    Our Investible Universe


    $ Value

    % $ Value

    No. Stocks

    % Stocks

    No. Countries

    US Market






    International Market






    Total Universe






    Source: Bloomberg. Data as at 31 December 2018.


    Whilst a higher percentage of value resides in the US market, the vast majority of investible stocks reside outside the US. Consider too that there is a de-equitisation process in the US that gets little attention. Since 1997, the broader universe of US-listed securities has declined from a peak of 7,433, to a 2017 count of 3,616, a 51% fall.1 Today, there are fewer US-listed companies than in the early 1980s, when the US economy was less than half its current size. There are multiple reasons for this shrinking stock count.2 Our own Unlisted Equities team was established so that clients could access exciting growth opportunities at a time when listed market opportunities were falling, and when companies were taking longer to list on the stock market.


    Median time from initial funding to IPO

    Source: National Venture Capital Association 2018 Yearbook, Data provided by PitchBook. US companies.


    To the best of our knowledge, there is no shrinkage of international equity markets. Quite the opposite in fact, as international markets are offering more listed investment opportunities while the US universe shrinks. For a number of years, Ernst and Young has tracked global IPO trends. In 2014, its research showed that the Americas accounted for 25% of all IPOs and 38% of the proceeds of those IPOs. For 2018, the US share had fallen to 19% and the proceeds to 29%, with more fallow periods in the intervening years, as can be seen in the following chart.

    1. Centre for Research in Security Prices, Booth Business School, University of Chicago.
    2. Mauboussin, Michael J. et al, The Incredible Shrinking Universe of Stocks, Credit Suisse. March 2017.


    Global IPO Trends

    Source: Ernst & Young, Global IPO Trends, Q4 2018.


    Between 2016 and 2018, few of the largest IPOs globally were US domiciled companies. For three years running, Hong Kong and China have topped the league table for IPO activity, according to the Ernst and Young study. As the chart below illustrates, this trend could continue as emerging market companies flourish, redressing the imbalance imposed by legacy benchmarks, and contributing to much of global GDP growth. The link between GDP and market cap is far from linear, but the direction of travel seems clear to us.


    Benchmarks are not necessarily representative of investment opportunities

    Source: Bloomberg. IMF World Economic Outlook. MSCI ACWI data as at April 2018. Global GDP data as at August 2018.



    Selected IPOs by proceeds

    Source: Ersnt & Young, Global IPO Trends, 2016, 2017, 2018. The 36 IPOs selected represent the top three listings by proceed in each quarter between 2016 and 2018.
    Note: Baillie Gifford does not necessarily hold these companies.




    We live and invest in a world overflowing with ‘information’. Hardly a day goes by without a new study telling us that ‘screen time’ is dominating our lives. Fewer reports ask whether more information is a good thing, or how much of it is mere noise. Fake news abounds. Baillie Gifford’s investment department consists of over 100 investment managers and investment trainees, each tasked with producing research to be shared company-wide. Our investment department is the best generator of good investment ideas for client portfolios.

    It helps that there are fewer investment banking analysts ‘covering’ stocks outside the US. For our investible universe there are two fewer analysts covering stocks in developed international markets than there are covering the US, and three fewer analysts covering emerging market stocks. As investment banks shrink and regulators look for managers to become less reliant on broker services, a well-resourced investment department grows in importance.

    Our roots are in Edinburgh, but when it comes to research, we’re getting out more. In 2019, we expanded our research capabilities by hiring a senior investment analyst to be based in our US office. Extended research placements in our Hong Kong office are also on the cards for 2019.

    Average Global Analyst Cover


    Source: Bloomberg. Based on a global universe of companies with a market capitalisation over $1 billion. 31 October 2018.


    Perhaps the starkest but simplest point to be taken from the investible universe table, is the number of countries. Having all your eggs in the US equity basket seems imprudent.

    Clichés only become clichés with repetition. They were first coined as valuable life lessons by those who had learned the hard way. The trade-weighted US dollar has been on a strengthening, if volatile, path since March 2008. It has strengthened 30% against a basket of international currencies. If and when that strengthening ends, exposure to a portfolio of international stocks, and multiple currencies, will offer a welcome boost to the value of plan assets invested in international assets.


    Trade-weighted US Dollar Index


    Source: Bloomberg.


    Over the years, the level of interest in US domestic equities versus international equities has waxed and waned, most commonly when one asset class has enjoyed a prolonged period of outperformance. We are at one such juncture today. Taking three-year rolling returns for the S&P 500 and the MSCI EAFE index as our comparative benchmarks, domestic US equities have enjoyed nine consecutive years of outperformance over international equities. As this is one of the longest periods of outperformance in the last 45 years, it is not surprising that more people are calling for more assets to be allocated domestically. However, after such a lengthy period of outperformance, this may not be the best time to make that switch.


    Three-year Rolling Returns – S&P 500 vs MSCI EAFE


    Source: Bloomberg. Annualised 3-Year relative rolling returns (S&P 500 vs MSCI EAFE).

    Past performance is not a guide to future returns.



    Comparing the performance of one asset class against another is all well and good, and simply looking at historic earnings growth of respective benchmarks shows that such outperformance is justified. The question for allocators of capital is surely ‘where do we go from here?’ Most white papers making the case for international equities will focus on diversification and valuation. The diversification point is almost always valid, and the valuation case happens to be valid at this point in time.

    On a forward price/earnings basis, the international benchmark is almost 3.0x multiple points cheaper, at 11.6x versus 14.5x and financial leverage is lower in international markets at 39% versus 55% for S&P 500 stocks. However, when it comes to earnings growth and profitability, the markets struggle to measure up to the US market. Both historic and forecast earnings growth for the S&P are far superior to international markets. It would appear that US companies do a better job of generating superior returns for shareholders too, albeit with more leverage. Rather than speculate as to whether US profitability margins have peaked, as many have claimed, we would again ask; where do we go from here?

    Finally, the tsunami of US domestic money flowing into passive funds continues unabated. A similar acceleration of flows into international passive funds cannot be ruled out, but the following table is illustrative for those who believe in active management. Taking the 5 year column as our example (our typical investment horizon), the benchmark has returned an annualised 0.67%. A first quartile manager has returned an annualised 3.03%, and the top 5% of managers have returned an annualised 5.10%. Done correctly, truly active management can and does outperform. Glib statements that active managers cannot add value are simply misleading.

    Table 2 – ACWI ex US Active Management Universe

    % Returns 3 Year 5 Year 10 Year
    ACWI ex-US benchmark* 4.48 0.67 6.57
    5th Percentile 8.94 5.10 12.16
    First Quartile 6.28 3.03 9.47
    Median 4.38 1.71 8.07
    Third Quartile 2.63 0.42 6.94
    95th Percentile 0.38 -1.57 5.81

    *MSCI AC ex US Free. Source: Intersec. Annualised returns to 31 December 2018.

    Past performance is not a guide to future returns.

  9. The opportunity set in international markets continues to expand while the US market shrinks. You will excuse us if some of this commentary seems self-indulgent, but as passionate believers in long-term, active investment management, we think it strange to have to defend the benefits of international equities. But defend them we must, and defend them we will, for another 110 years if necessary.


  10. Risk Factors AND Important Information

    The views expressed in this article are those of Stephen Corr and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect personal opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.

    This communication was produced and approved in the first quarter of 2019 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.

    Potential for Profit and Loss

    All investment strategies have the potential for profit and loss, your or your clients’ capital may be at risk. Past performance is not a guide to future returns.

    Stock Examples

    Any stock examples and images used in this article are not intended to represent recommendations to buy or sell, neither is it implied that they will prove profitable in the future. It is not known whether they will feature in any future portfolio produced by us. Any individual examples will represent only a small part of the overall portfolio and are inserted purely to help illustrate our investment style.

    This article contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research and Baillie Gifford and its staff may have dealt in the investments concerned.

    Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indexes or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

    The S&P 500 (“Index”) is a product of S&P Dow Jones Indices LLC, a division of S&P Global, or its affiliates (“SPDJI”). Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC, a division of S&P Global (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”). Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.

    All information is sourced from Baillie Gifford & Co and is current unless otherwise stated.

    The images used in this article are for illustrative purposes only.


    Annual Past Performance to 30 September Each Year

      2015 2016 2017 2018 2019
    MSCI ACWI ex US (%) -11.8 9.8 20.2 2.3 -0.7
    MSCI EAFE -8.3 7.1 19.7 3.3 -0.8
    S&P 500 -0.6 15.4 18.6 17.9 4.3

    Source: Baillie Gifford & Co and relevant underlying index providers. US Dollars.

    Past performance is not a guide to future results.


    Baillie Gifford & Co and Baillie Gifford & Co Limited are authorised and regulated by the Financial Conduct Authority (FCA). Baillie Gifford & Co Limited is an Authorised Corporate Director of OEICs.

    Baillie Gifford Overseas Limited provides investment management and advisory services to non-UK Professional/Institutional clients only. Baillie Gifford Overseas Limited is wholly owned by Baillie Gifford & Co. Baillie Gifford & Co and Baillie Gifford Overseas Limited are authorised and regulated by the FCA in the UK.

    Baillie Gifford Investment Management (Europe) Limited provides investment management and advisory services to European (excluding UK) clients. It was incorporated in Ireland in May 2018 and is authorised by the Central Bank of Ireland. Through its MiFID passport, it has established Baillie Gifford Investment Management (Europe) Limited (Frankfurt Branch) to market its investment management and advisory services and distribute Baillie Gifford Worldwide Funds plc in Germany. Baillie Gifford Investment Management (Europe) Limited is a wholly owned subsidiary of Baillie Gifford Overseas Limited, which is wholly owned by Baillie Gifford & Co.

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    Baillie Gifford International LLC is wholly owned by Baillie Gifford Overseas Limited; it was formed in Delaware in 2005. It is the legal entity through which Baillie Gifford Overseas Limited provides client service and marketing functions in America as well as some marketing functions in Canada. Baillie Gifford Overseas Limited is registered as an Investment Adviser with the Securities & Exchange Commission in the United States of America.


    Ref: 38124 INS WE 0378

  11. Stephen Corr

    Client Service Director

    Stephen joined Baillie Gifford in 2016 and is a Client Service Director within the International Alpha Team. He previously spent 16 years as a Global, International and EAFE portfolio manager with Blackrock, Scottish Widows Investment Partnership and, most recently, Nikko Asset Management. Stephen graduated Bachelor of Business Studies (BBS) from Dublin City University in 1998 and became a CFA Charterholder in 2003.