Morningstar Advisor - October/November 2012 - (Page 70)

Screens Amid Turmoil, Don’t Discount Foreign Equities By Vincent Yu Use this screen to find overlooked small- and mid-cap international stocks. Uncertainty in Europe has understandably led many U.S. investors toward domestic stocks. We believe, however, that there is still value to be discovered in international equities, especially smaller names that often get overlooked. With the U.S. economy deleveraging in the next few years and developing countries taking the spotlight in economic growth, investors would be remiss in not taking advantage of the opportunity to invest in international markets. Even so, we aim to look for international stocks that are relatively stable and can survive any impending economic instability. Many investors’ portfolios are overconcentrated with domestic stocks because of a combination of familiarity bias and the current economic climate. It is important, however, to not overlook value within international stocks. Although Morningstar Principia cannot select particular countries, we can search for nondomestic companies. market capitalizations are less than $5 billion. This allows us to look for small- and mid-cap international companies. And ( Economic Moat Or Economic Moat  Wide  Narrow ) And Market Cap  5B Domestic  No Because our goal is to look for international equities that might not be receiving as much attention owing to fears relating to investing internationally, we also want to filter out large-cap companies who receive significant attention from both analysts and investors regardless of the economic situation. We will look for companies whose The ultimate indication of a good business, however, is the ability for the business to reinvest its earnings in growing shareholder value. To that end, we want to still look for companies who have some or many competitive advantages over their competitors. Morningstar analysts use the economic moat rating to describe the ability of a business to earn returns on capital of more than their cost of capital. With five sources of a moat—intangibles, cost advantage, switching costs, network effect, and efficient scale—and 70 Morningstar Advisor October/November 2012

Table of Contents for the Digital Edition of Morningstar Advisor - October/November 2012

Morningstar Advisor - October/November 2012
Letter From the Editor
Ill Communication
Do You Use Factor-Investing Strategies?
Practicing What She Preaches
How to Determine the True Price of ETFs
The Quant Factor
Managers Dispute the Death of Equities
Investments á la Carte
Investment Briefs
Five Inconvenient Truths of Manager Research
Health Care’s Outlook Clarifies
Exploring the World of Factors
Uncloaking the Alpha Machine
Factor Strategies Gain Footholds in Practices
Big Mo
Fitting Factors Into the Formula
Clients Have a Friend in Luther King
Less-Liquid Holdings Mean More-Solid Results
Retirement-Withdrawal Strategies Quantified
Amid Turmoil, Don’t Discount Foreign Equities
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
Should I Stay or Should I Go?

Morningstar Advisor - October/November 2012