Going where the value is greater: international equities

Theme and Background

This chapter discusses why international equity markets currently present value investment opportunities. The report points out that factors such as the price dispersion between value and growth stocks, the small-cap segment, and market volatility collectively create a favorable environment for value investing.

Core Thesis

The author (David Herro) clearly asserts that significant value investment opportunities currently exist in international equity markets. Counterintuitively, despite overall market volatility, the valuation gap between value and growth stocks has widened to historically extreme levels, providing a window for contrarian positioning.

Key Arguments and Data

Price Dispersion: The widening valuation gap between value and growth stocks creates buying opportunities for value strategies.
Small-Cap Risk and Return: The Oakmark International Small Cap Fund employs a concentrated portfolio strategy (investing in a relatively small number of stocks), meaning the rise or fall of a single security has a greater impact on the fund's net asset value. While this strategy has the potential to generate attractive long-term returns, it also increases fund volatility.
Small-Cap Specific Risks: Stocks of smaller companies typically carry higher risk than those of larger companies, manifested as: greater volatility, smaller public market size, shorter operating histories, weaker financing capabilities, and more limited product lines, making them more sensitive to market pressures.
Foreign Securities Risks: Investing in foreign securities faces the following risks:

Risk Category	Specific Details
Currency Fluctuations	Changes in currency values affect returns
Regulatory and Accounting Differences	Different regulations, accounting standards, trading practices, and information availability
Transaction Costs	Typically higher than in U.S. markets
Political Risk	Geopolitical uncertainties

Value Stock Risk: Value stocks may fall out of favor during certain periods and underperform growth stocks.

Companies/Assets Involved

Oakmark International Small Cap Fund: This fund adopts a concentrated stock-picking strategy, where fluctuations in a single security have a greater impact on net asset value, combining long-term return potential with short-term volatility.
International Equities (Overall): As value investment targets, they face specific risks including currency, regulatory, transaction cost, and political risks.

Investment Implications

Directional Judgment: Investors should focus on international value stocks, particularly in the small-cap segment, leveraging the current price dispersion for contrarian positioning.
Risk Warning: Investors must tolerate higher volatility, concentrated stock risk, and the currency, regulatory, and political risks specific to foreign securities. Value stocks may underperform growth stocks for extended periods, requiring patience.