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Market Update

4 Foreign Stocks Top Managers Have Been Buying

Managers from Aberdeen, Matthews, and Oakmark have bought shares of Chinese Internet companies, a global ad agency, and a cable giant.

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What's the only thing better than being an investor in U.S. stocks? Being an investor in international names.

The S&P 500 is up more than 17% for the year to date as of this writing. But several markets across the globe--both developed and developing--are up even more. In fact, most international-fund categories are outperforming their domestic equity counterparts this year.

Given the worldwide rally, we turned to some of our favorite Morningstar Medalist managers to find out where they're finding opportunities today.

Devan Kaloo and Joanne Irvine, who steer the Silver-rated Aberdeen Emerging Markets (GEGAX), take a bottom-up approach to investing in developing markets. They focus on high-quality businesses with good corporate governance that are trading at attractive prices; many of the names in the portfolio have been there for several years. Among other purchases, the duo added Chinese Internet company Tencent (TCEHY) to the portfolio last quarter.

The fund's latest commentary explains that the purchase reflects management's growing comfort with the company's business, structure, and governance.

"Over time, Tencent has sustained its revenues and maintained market dominance in gaming, while creating a powerful ecosystem that leverages on its various offerings, in our view," they note. "We have been particularly encouraged by the company's progress on financial services, online advertising and digital content." Monetization of the company's sizable user base should drive earnings growth, they argue.

Indeed, Tencent's subscriber base is sizable: the Weixin/Wechat boasts 963 million monthly active users in China, while instant-messaging service QQ counts 850 million monthly active users.

"We believe the vast and sticky user base has formed a strong network effect, which provides the basis for Tencent's wide economic moat," writes Morningstar analyst Chelsey Tam in her latest company report. The company currently monetizes its social-networking platforms by selling in-game and virtual items, premium services, and online advertising.

"In 2016, Tencent distributed almost half of China's top 10 mobile games and 25% of the top 100 mobile games. Meanwhile, Tencent's mobile payment system has rapidly been catching up with Alipay, and its market share increased to 37% in the fourth quarter of 2016 from less than 20% in 2015, leveraging its massive user base and extensive cooperation with third-party services." Tam expects monetization to extend to payments, financial products and cloud services over the long term. Shares are currently fairly valued based on Morningstar's metrics, trading in 3-star range.

The managers of Silver-rated Matthews Asian Growth & Income (MACSX), Robert Horrocks and Kenneth Lowe, invest in a blend of attractively priced dividend-paying stocks, preferred stocks convertibles, and other bonds. The pair picked up Chinese online game developer NetEase (NTES) last quarter. They say in their most recent commentary that the company has a strong moat, thanks to its user base, successful track record in developing games, and licensing agreements with foreign developers.

"We used the weakness associated with its second-quarter results to initiate a position in the company on August 10, 2017 as the valuation declined to an approximate 16.5x forward P/E and dividend yield of 1.5%," they explained. "This was due to concerns that the company is in between hit games and that its e-commerce ventures would prove value-destructive."

Morningstar awards NetEase a narrow moat and projects the company's return on invested capital to average more than 50% for the next 15 years.

"We believe NetEase is still one of the long-term winners in the online games area, supported by its existing strong intellectual property as well as continuous release of new games," notes senior analyst Marie Sun in her latest analyst report. "In addition, NetEase's e-commerce business has become another growth driver, which is positioned well through satisfying the increased demand of good-quality merchandise by Chinese consumers."

Shares currently trade in 3-star range, suggesting that they're fairly valued today.

Gold-rated Oakmark International's (OAKIX) David Herro and Michael Manelli like companies trading at deep discounts to what the duo views as its intrinsic value. They also favor companies with shareholder-focused management. They picked up shares of WPP (WPPGY) and Liberty Global (LBTYA) last quarter.

WPP was already a portfolio holding that the pair added to on share-price weakness. In their latest commentary, Herro and Manelli acknowledge that the global ad agency faces some near-term challenges, which are reflected in management’s recently lowered growth guidance. Still, they like the company's long-term prospects.

"WPP offers its clients an integrated marketing team, composed of members from different areas of specialty across the firm, which has proven successful in recent years, and revenues attributed to this methodology have grown," they write. "Furthermore, the net worth of the company's founder and CEO Sir Martin Sorrell is driven by his share ownership in WPP. Subsequently, he has a vested interest in growing shareholder value. Along with Sorrell's ongoing focus on expanding operating margins, he has anticipated important industry changes, such as the move to digital advertising and the increasing importance of emerging markets."

Morningstar awards WPP a narrow economic moat.

"WPP holds valuable intangible assets, in our view, around the holding company's brand equity and the strong reputations of its various advertising agencies around the world," says Morningstar analyst Ali Mogharabi in his latest report. "We also think the firm's continuing investments in consumer data accumulation and analysis give WPP a sustainable competitive advantage."

Mogharabi adds that the narrow-moat company can continue to leverage is valuable intangible assets to maintain its leadership in developed market while gaining further traction in emerging markets, which should provide some tailwinds for top-line growth. Trading in 4-star range as of this writing, shares are currently undervalued by Morningstar's metrics. 

The Oakmark team also picked up Liberty Global last quarter. Liberty Global is Europe's largest cable operator, offering broadband, television, fixed voice, and mobile services via key assets such as Virgin Media (U.K.), Unity Media (Germany), and UPC (Switzerland).

Morningstar assigns Liberty Global a narrow moat.

"With the high penetration rates Liberty has achieved--50%-70% of homes passed--it would be very difficult for a competitor to enter the market," notes Morningstar senior analyst Allan Nichols in his latest company report. "Liberty Global has succeeded in using its faster broadband network (often in excess of 200 Mb/second) to gain subscribers. These are often triple-play customers subscribing to pay television, broadband, and fixed-line telephony, which generate higher average revenue per user." And as more subscribers sign up for these bundles, they become stickier customers, which strengthens the company's moat.

The shares are currently trading in 4-star range, suggesting that they're undervalued.

Susan Dziubinski does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.