2017 Factor Alpha Newsletter
International ADR

Categories Investing, OSAM Research

While investors have long enjoyed the growth in U.S. equities (usually the largest allocation in their overall portfolio!), regional leadership is a cyclical pattern. At some point, it is very likely the U.S. will no longer be the highest-performing market globally. Huh?1 Sure, the U.S. equity market has risen 293% since its credit crisis bottom in March 2009 — versus Developed International and Emerging Markets “mere” rise of 150% and 154%, respectively. Well, this 2Q17 International ADR2 (IADR) edition of the Factor Alpha Newsletter, dispassionately, sans headlines and other noise, compares our built-in-house multi-factor themes to the MSCI ACWI ex U.S.3

We use various hybrids of several multi-factor themes4 to build conviction-weighted, high Active Share portfolios. Individual factors are chosen because they are driven by fundamentals and have proven their efficacy over full market cycles. Note: it’s important not to use any of these factors and/or themes in isolation.5

Using “ADR” as an example, the charts below provide additional insight that helps explain our strategy’s6 performance, paired with our Factor Attribution Tool. The result is an entirely unique, customized quarterly market commentary. If you are a Financial Professional, email info@osam.com for your copy of the report.

With no further ado, here’s how the ADR universe looks in the 6 months leading up to 2Q17:7

To see what’s happened in the ADR market during the first half of 2017, first we’ll isolate the difference in performance associated with the MSCI ACWI ex U.S. benchmark’s methodology versus an equal-weighted selection universe:

Size: “Market Cap-Weighted” less “Equal-Weighted”
(Cumulative excess returns, 1/1/17–6/30/17)

Next, the cumulative excess returns in the first half of 2017 (1H17: 1/1/17–6/30/17) for the top deciles8 of each theme versus the entire universe of stocks in the benchmark:

OSAM Value

Stocks trading at large discounts to current sales, earnings, EBITDA, and Free Cash Flow.

OSAM Momentum
Stocks with impressive and stable recent total returns.

OSAM Financial Strength
Stocks that use debt responsibly, and aren’t overly reliant on outside financing.

OSAM Earnings Growth
Stocks whose profitability is high and trending up.

OSAM Earnings Quality
Stocks with strong cash flows and conservative accounting.

Shareholder Yield
Stocks returning high amounts of cash to shareholders through dividends and buybacks.

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  1. Don’t take our word for it: see Reuters’ July 6, 2017 article “EU, Japan Seal Free Trade in Signal to Trump” (reuters.com/article/us-japan-eu-trade-idUSKBN19R17U)
  2. An American Depositary Receipt (ADR) is a negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock traded on a U.S. exchange. (Source: investopedia.com/terms/a/adr.asp)
  3. The MSCI ACWI (All Country World Index) ex U.S. is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global developed and emerging markets, excluding the United States. This index is net of withholding taxes.
  4. We blend factors together to build proprietary multi-factor themes to help reduce the noise of any one factor, but even investment themes experience cyclical periods of underperformance. Themes are then woven together depending on the target market’s predicate.
  5. In any given year one factor by itself can do well or poorly, creating noise in the long-term process. By “compositing” several factors together, investors are able to “diversify” their exposure to factors — similar to using an ensemble of equities, bonds, and capital as their suite of assets.
  6. See osam.com’s “Separate Accounts” tab for more info on the International ADR (IADR) strategy. In a nutshell, the IADR strategy seeks to provide long-term appreciation through exposure to international equities, primarily using American Depository Receipts (ADRs). Generally, the holdings are selected evenly across a value model, a core model, and a growth model. Emerging market exposure is usually limited to a maximum of 20% at purchase. The strategy is regularly optimized to its investment model and is periodically rebalanced.
  7. For these live-time factor snapshots, the multi-factor portfolios (themes) are calculated using a compositing methodology: Monthly portfolios are created with a 12-month holding period, then the 12 monthly portfolios are combined to create the composite portfolio.
  8. For example, Value’s top decile is “the cheapest 10% of stocks” within the universe.