How in the World Can You Find the Return You’re Looking For?
The Case for Active Management Overseas

Indexing of domestic strategies has become increasingly popular over the last few years as active domestic funds have had a hard time keeping up with U.S. indexes and – at least in the short term – investors have been rewarded for deciding to go passive.

International funds have also seen a growing trend toward passive strategies, but the outcomes for investors have been decidedly different in markets outside the United States.

The below table demonstrates the percentage ranking of a passive domestic fund and a passive foreign fund versus their respective Morningstar active fund peer groups.

* Data as of 12/31/16. Source: Morningstar Direct.
Vanguard 500 Index Fund offers investors diversified exposure to U.S. large-cap stocks and seeks to track the S&P 500 index. The iShares MSCI ACWI ex U.S. ETF seeks to track the investment results of an index composed of large- and mid-capitalization non-U.S. equities. The US Large Blend and US Foreign Large Blend carry a mix of value and growth stock in the US market and in the foreign (non-US) market.

As evidenced above, active management in non-U.S. markets has continued to add value and, as our Managing Partner Brian Beitner explains in the video below, we believe there are several reasons why.

The Real Value of Excess Return

In a rising-rate environment where the U.S. 10-year bond yields only around 2.5% and equity valuations are high, investors are understandably concerned about future returns in their portfolios. In such a world, an extra 200-400 basis points of return can significantly improve the chances of meeting portfolio expectations. At Chautauqua, we believe an allocation to actively managed international investments can provide that.

Since inception, the Chautauqua International Growth Equity composite strategy has provided, net of fees, 269 basis points of annualized outperformance vs. the MSCI ACWI ex-U.S. benchmark. Our goal is to provide consistent outperformance versus the benchmark over a normalized investment cycle of three to five years.

* As of 12/31/16. These performance figures are preliminary and have yet to be verified by Ashland Partners.

With U.S. and International markets increasingly correlated, we at Chautauqua Capital believe successful stock picking is the only route to outperformance. To capture the full benefit of stock selection skill, we believe portfolios should be invested for the long-term, on a conviction-weighted basis, in a concentrated set of best idea investments. To mitigate risks within these portfolios, we enforce strict quality criteria and employ a thoughtful approach to sector and geographic diversification with a forward-looking valuation discipline.

For the past 10 years, we have offered our consistently rigorous investment approach to institutional clients in our international portfolios

Performance data quoted represents past performance. Past performance does not guarantee future results. Investment return and principal value of an investment in the strategy will fluctuate so that an investor’s shares when redeemed may be worth more or less than their original cost. The composite’s current performance may be lower or higher than the performance data quoted. Performance figures assume reinvestment of all dividends and capital gains.

Net of fee performance is calculated using actual management fees. Actual investment advisory fees may vary across accounts and result in different net returns. Net results do not include the deduction of custodial fees or other administrative expenses, which will also reduce the returns. The fee schedule is as follows: 1.00% on the first $50 million; 0.90% thereafter.

The performance of the Chautauqua International Growth Equity Composite is measured against the MSCI ACWI ex-U.S. Index® – GD (gross of dividend withholding taxes). The MSCI ACWI ex-U.S. Index® is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets excluding the United States. Indexes are unmanaged and direct investment is not possible. The composite's concentration may make the performance of an account more volatile than the performance of funds that more closely mirror an index. The account may invest up to 15% of its total assets in U.S. dollar denominated foreign securities and ADRs. Foreign investments involve additional risks such as currency rate fluctuations and the potential for political and economic instability, and different and sometimes less strict financial reporting standards and regulation.

Mr. Brian Beitner has been the sole decision maker for the composite since the inception in 2006. From January 2006 to November 2006, the International Growth Equities Composite was a carve out of a TCW Global fund where cash was allocated proportionally based upon the net asset value of each strategy at the time.

The composite is comprised of accounts whose objective is to outperform the benchmark over the long term by investing in approximately 25 to 35 securities in leading companies that possess sustainable competitive advantages and are positioned to benefit from long-lived thematic growth opportunities. The strategy will hold positions in several, but not necessarily all, economic sectors. Individual issuers will be headquartered in various regions around the world, primarily excluding the United States. The weightings are not expected to equate to these regions in terms of the countries portion of the Gross World Product. While CCM's objective is to outperform the stated benchmark, it does not imply that this strategy shall share, or attempt to share, the same or similar characteristics of the benchmark or attempt to track the benchmark. The objectives of the investment strategy have not materially changed over time. The composite includes accounts managed in accordance with the International Growth Equity Strategy, except for accounts subject to material client restrictions, which are, therefore, deemed non-discretionary. Therefore, the composite dispersion between accounts is not material. The portfolio composition may change over time.

Contact Information

To learn more and discuss how Chautauqua’s strategies can help meet your investment goals, please contact David Lubchenco.


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