Morningstar Magazine - August/September 2018 - 20

Dispatches

In general, the averages for large-cap domestic
medalists' non-U.S. revenue percentages
cluster around the S&P 500's 38%, with large-value
funds the most U.S.-centric and large-growth
funds the least. Even funds whose home-country
bias remains strong after accounting for revenue
sources still have significant overseas exposure.
Among all large-cap medalists, three value
funds own firms that in total receive the lowest
percentage of their revenue from outside
the United States. Yet, those percentages are still
significant. JPMorgan Value Advantage JVAAX
and Dreyfus Strategic Value DAGVX, each
with Silver ratings, receive, respectively, 22% and
28% of their revenue from abroad. Bronzerated Fidelity Value Discovery FVDFX places third
with 29%.
Domicile still matters, though. Aside from renewed
concerns about tariffs and trade wars, not every
country has laws in place to protect investors to
the same extent as the most shareholderfriendly developed markets. Moreover, some
companies' revenue sources still prove to be quite
provincial despite their size and prominence.
China's Internet goliaths Tencent TCEHY and
Alibaba BABA currently fit this bill. Tencent's ADR
trades over the counter in the United States and
Alibaba's on the New York Stock Exchange. Shares
of both have surged this past year, and the
companies' respective U.S. dollar market caps
of roughly 560 billion and 500 billion, as
of mid-March, would make them top-10 S&P 500
constituents, if they were to be incorporated
into that benchmark. And yet Tencent,
per its latest annual report, received only about
5% of its revenue outside China, though the
WeChat owner did increase its Snapchat
investment in late 2017. Alibaba also recently
sought to generate revenue from beyond
its borders by acquiring a controlling stake
in Southeast Asia e-commerce platform Lazada,
but thus far, its non-China revenue exposure
has been so negligible that the firm does
not present any geographical information on
its origins.
Investors who hold domestic offerings with
significant weightings in Tencent and Alibaba
might be interested to know the degree

20

Morningstar August/September 2018

to which their fortunes are leveraged to those
companies and the country-specific risk associated
with them. To that end, here are the three
U.S. funds with the largest combined weightings
in Tencent and Alibaba. Each falls into the
large-growth category and has a Morningstar
Analyst Rating of Gold.
Harbor Capital Appreciation leads the way. As of
year-end 2017, the fund had a 7.2% combined
stake in Alibaba and Tencent, both top-10 holdings.
Comanagers Sig Segalas and Kathleen
McCarragher of subadvisor Jennison Associates
focus on dominant businesses they expect to grow
at a significantly faster clip than the broader
market. That has long led them to tech stocks,
a preference that has become even more
pronounced of late, with just more than half of the
fund's assets in tech, 12 percentage points
more than the Russell 1000 Growth Index. They
built the fund's positions in Alibaba and Tencent
years ago, though, and this is their second
go-around with Alibaba. They first bought the
stock after its September 2014 IPO and sold
it at a loss in 2015's third quarter before buying it
back in 2015's fourth quarter. Meanwhile, they
had added Tencent in early 2015. Both stocks have
subsequently become winners for the fund.
T. Rowe Price Blue Chip Growth TRBCX in late 2017
had a 6.1% combined stake in Alibaba and Tencent,
the fund's fifth and 11th biggest positions,
respectively. Larry Puglia, who has managed the
fund since its mid-1993 inception, likes firms
with above-average, durable growth prospects,
strong free cash flow, and management
that allocates capital well, and the portfolio has
typically included a few non-U.S. names. Puglia
also bought Alibaba after its September 2014
IPO but held on during that stock's rough patches.
Tencent entered the portfolio most recently
in 2015's first quarter, but he had previously held
the stock between late 2009 and early 2014.
American Funds New Economy ANEFX has a 3%
Tencent position, the bigger position of the
two, placing second in the fund's December list
of holdings. Its 1.5% Alibaba stake placed
11th. Both positions fit with this multimanager
fund's nearly global mandate. Its pursuit of firms
driving or benefiting from innovation has led

it to invest between 25% and 35% of its assets
in companies domiciled overseas, including
10% to 15% in emerging-markets stocks like
Alibaba and Tencent. The fund first bought both
companies in 2015's second half.
The three domestic funds highlighted here, as
well as the broader geographic evolution of
investing, are yet further reminders that investors
should know and understand what they own.
Newfound insight provided by aggregating
the revenue sources of fund holdings is crucial,
but one shouldn't neglect domicile either.
Alec Lucas is a senior manager research analyst with
Morningstar Research Services.
Robby Greengold is a manager research analyst with
Morningstar Research Services.

Values to Be Found in
Defensive Sectors
The Morningstar Global Markets Index edged up
1% for the year through late June. Our global
equity coverage universe appears fairly valued, in
aggregate: The market-cap-weighted price/fair
value ratio across our coverage of roughly 1,600
stocks is 1.00.
Generally, we're more positive on sectors that are
less sensitive to the economic cycle, which

TRENDS

Jeremy Grantham:
The Race of Our Lives
Jeremy Grantham, founder and chief
investment strategist at GMO,
gave a keynote address on June 12
at the Morningstar Investment
Conference. He argued that we are
in "the race of our lives" to mitigate
the cataclysmic consequences
of climate change. With GMO's
permission, we present six of his most
provocative charts.



Table of Contents for the Digital Edition of Morningstar Magazine - August/September 2018

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