Global Investing The Power of Teamwork

When Italian voters went to the polls earlier this year, it marked a crucial moment for the European and global financial marketsand for T. Rowe Price analysts and portfolio managers. At stake were the future of the euro and the stability of the European banking system, which is heavily invested in euro bonds. As the Continent's largest government debtor, Italy was critical to shoring up the eurozone's deteriorating finances. Uncertainty over the election and the potential damage the outcome could cause to economic growth and earnings deeply unsettled Europe's equity and corporate bond markets. Kenneth Orchard, a T. Rowe Price portfolio manager and analyst who covers European sovereign debt, recalls the moment. "It was a critical time in terms of investor perceptions," he says. "We knew that we had to take action."

Orchard and a group of analysts covering European banks flew to Rome for talks with leading government and political figures. They then headed to Milan, Italy's banking capital, where they joined the managers of
T. Rowe Price's European and international equity portfolios. "We looked at the health of each bank, in the context of both the overall economic environment and company-specific factors," explains Fred Rizzo,
a T. Rowe Price equity analyst covering European banks. "One of my key takeaways was that the market had become too pessimistic about one of the larger Italian banks. So I recommended the stock to our portfolio managers, and a number of them added it to their portfolios."

Europe's debt crisis illustrates the importance of having a top-notch global research platform that combines high-level economic and industry analysis with detailed, company-by-company knowledge. Such resources can make a big difference. "Research is the lifeblood of our firm," says Christopher Alderson, head of international equity and director of T. Rowe Price International, the company's non-U.S. investment arm. "Our biggest source of competitive strength is the fact that we have an excellent global network that connects information around the world especially well."

The size and depth of the firm's global credit and equity research teams—among the largest in the industry—gives portfolio managers a critical edge:

  • A global research team of 130 equity analysts covers more than 800 global stocks, creating a deep foundation for stock selection.
  • T. Rowe Price's 147 fixed income professionals—and its independent, proprietary credit rating system—lend a critical extra dimension to fixed income research at a time when sovereign and credit risk both have an outsized influence on the global investment environment.
  • The firm has tripled the number of investment professionals dedicated to emerging debt markets over the past 10 years.
    21 analysts are dedicated to emerging equities.
    Regional experts manage portfolios in each of the four major emerging market regions.

The importance of a strong global research network is likely to rise in the years ahead, as U.S. investors increasingly look abroad to improve diversification and access faster-growing foreign economies, especially in the emerging world.

While international markets can present additional risks—such as greater volatility, currency fluctuations, and political instability—investors who stick to a strictly U.S.-only portfolio strategy may miss out on opportunities in other fast-growing economies. Consider these important trends:

  • The International Monetary Fund projects that the developing economies—including both emerging markets and frontier markets such as those in Africa—will account for more than 54% of global gross domestic product by 2017, up from just 37% at the beginning of the last decade.
  • U.S. equities accounted for less than 46% of global stock market capitalization at the end of 2012, down from 54% in 2002. Global capitalization is likely to tilt even more rapidly toward foreign markets in the coming years because many are still relatively undercapitalized, given the size of their economies.
  • Emerging debt issuance is rapidly rising, as government and corporate borrowers tap in to expanding markets for both U.S. dollars and local currency bonds.



Identifying potential investment opportunities in growing non-U.S. markets can be a challenge, given the size and diversity of these markets. Information about overseas companies and industries may be harder to come by and less reliable than it is in the U.S., especially in the developing world, where companies may be more lightly regulated and less financially transparent to outside investors. International small-cap stocks are a good example. "This is a huge and diverse universe, with potentially 50 markets and up to 10,000 stocks," observes Justin Thomson, portfolio manager of the T. Rowe Price International Discovery Fund (PRIDX), which invests in small-caps. "To invest in this asset class, you need to have total immersion in the markets and the experience of knowing where to look."

Because foreign markets are often less transparent, skilled analysts and managers may have more room to uncover attractive opportunities that other investors have missed. "We put even greater emphasis on standards of corporate governance in the emerging markets than we would in the developed countries," Thomson explains. "It's also essential to have local contacts and a local presence, which is why we have analysts on the ground full-time in London, Hong Kong, Tokyo, Singapore, and Sydney."

Having a strong presence in markets around the world makes a difference. Consider that the average small-cap stock in Europe is covered by four investment bank analysts. In Asia, however, it's just two. "That's a great source of our opportunity," Thomson says. "Limited coverage means that if we are on the ground and doing our jobs right, we can get in ahead of the crowd. I call it the ‘discovery effect.'"

However, having a well-resourced research platform with a global reach isn't enough. Analysts and portfolio managers also need to know how to pool those resources—and their skills and insights—by collaborating across regions, industries, and asset classes. The firm's credit and equity analysts have learned that intricate balance sheet management techniques used by many companies today may require a mutual understanding of both sides of the firm's capital structure (debt and equity) to assess its true value.

"Our equity analysts are in frequent contact with their fixed income counterparts who cover the same sectors or industries," says Kamran Baig, director of equity research for Europe, Latin America, the Middle East, and Africa for T. Rowe Price. "We think that helps both of them understand the situation better and make better decisions."

Likewise, globalization and rapid changes in industry structure often require analysts to cooperate across regional boundaries. An example: "Our banking analyst here in London might visit European banking subsidiaries in Asia—or Asian banks with large European businesses," Baig says. "And he would make sure our Asian bank analysts were kept in the loop."

Collaboration across investment disciplines can be particularly crucial in the emerging markets, where entire asset classes that barely existed a decade ago have become important sources of return in many portfolios. China is a good example of this growth trend. The world's second-largest economy experienced massive lending growth in recent years, which led to a significant credit crunch earlier this year. "We knew that some Chinese companies were having liquidity troubles," recalls Kes Visuvalingam, director of Asian equity research for T. Rowe Price. "And we knew our credit analysts would have a better handle on those issues than we did. We also have very good fixed income coverage in China. So we worked very closely with our credit analysts to help us out. We feel like that gave us a real advantage over our competitors in a period of considerable market volatility."

Illustration by HARRY CAMPBELL
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