"Supranational" Investing
Some of the very best Argentine steak houses are in Amsterdam, some of America’s very best rodeo cowboys are Brazilian and some of the world’s very best beach volleyball courts are high in the Swiss Alps. The “cosmopolitanization” of the world is under way — creating vast, new and diverse patterns of commerce… which also means vast, new and diverse investment opportunities.
Because cultural influences continuously tend to travel and disperse like pollen on the breeze, the resulting cross-pollination produces a dizzying array of cultural hybrids. In one sense, therefore, the world is becoming smaller. But as it “shrinks,” it is also expanding culturally. When cultural influences combine with one another, they sometimes produce sociological phenomena and expressions that defy strict national categorization.
To illustrate the point, let’s return to those Argentine steaks, American cowboys and beach volleyball courts…
According to a colleague who sometimes knows what he’s talking about, “There’s an Argentine restaurant in Amsterdam named CAU that serves a filet mignon that is as good as any filet I have ever eaten in Argentina or Uruguay…maybe better. CAU stands for ‘Carne Argentina Unica’…and that’s exactly what CAU serves. Argentina itself still holds the title for best-ever rib-eye, but the filet at CAU was incredible!”
A similar Southern Hemisphere/Northern Hemisphere curiosity is unfolding in the American rodeo world.
“Five of the top six riders on the Colorado-based Professional Bull Riders Tour all hail from Brazil,” The Wall Street Journal reports. “[And] there are five more Brazilians among the [rest of the] top 40 riders… The South American country has been producing strong contenders since the tour began nearly two decades ago, but never before this season have its cowboys been so dominant, with Brazilians winning 17 of the 27 events so far. Their prowess has other riders frantically reassessing their techniques, scrambling to learn Portuguese and even vacationing in Brazil in hopes that secrets to the Brazilians’ success will somehow seep in.”
“I’m kinda ticked about it,” a 60-year-old computer specialist from Fargo, N.D., tells the WSJ. “There’s nothing more American than a cowboy, and all of a sudden these Brazilians are walking away with everything.”
The Brazilians are also walking away with a lot of the beach volleyball titles…often without even the setting foot on a beach. Last summer, the FIVB Beach Volleyball Swatch World Tour hosted a tournament in Gstaad, Switzerland — 3,440 feet (1,050 meters) above sea level, the highest altitude tournament on the tour. Brazilian duos won both the men’s and women’s 2011 event in Gstaad, but the semifinal contests also featured teams from Germany, Poland, China, Italy and, yes, the US.
As recently as 10 years ago, most beach volleyball tournaments featured mostly American beach volleyball players playing on actual American beaches. No more. Today, the best professional players could hail from almost any country on the planet…and the tournaments, likewise, could take place almost anywhere on the planet…including the Swiss Alps.
This very unscientific sample of cultural cross-pollination and hybridization mirrors a powerful trend in the world of commerce and, therefore, in the world of investing. Regional cultural differences remain, but national borders are becoming increasingly irrelevant to economic trends. They are accidental, artificial constructs that surround underlying supply/demand phenomena.
International commerce, therefore, is becoming less and less about bilateral trade between nations and more and more about worldwide demand for a specific product or service. Accordingly, international investing is becoming less and less about “where” and more and more about “what.”
Investors can benefit by recognizing this subtle nuance. Let me explain.
Traditionally, US investors seeking to invest overseas would allocate capital to a specific country or region. They might buy an “Asia Pacific Fund,” for example, or maybe something more targeted, like a “Singapore Fund.” But country- or region-specific considerations drove the investment decision. That’s traditional international investing, and it is still a valid strategy.
But a complementary international investing strategy is something we call “supranational” investing.
“Supra-,” according to Webster’s Unabridged Dictionary, is “a prefix meaning above, over, beyond.” Supranational investing, therefore, looks above, over and beyond national and regional borders. It seeks to identify the companies that will deliver the greatest growth around the world, rather than the countries that will deliver the greatest growth. Supranational investing seeks to identify the products or services that will attract the greatest demand growth throughout the entire world and then invest in the companies that provide these products or services.
A company like Pall Corp. is a great example. Pall, which trades right here on the NYSE under the symbol PLL, manufactures and supplies filtration, separations and purification products. In the company’s own words, “Pall’s fluid management solutions enable customers to purify and conserve water, consume less energy, make alternative energy possible and practical, advance medicine and minimize emissions and waste.”
Pall benefits from local demand, yes, but also it benefits from demand from the rest of the world. The company generates only one-third of its sales from the Americas. Europe accounts for 39% of its sales, while Asia accounts for 28%. As such, Pall is not an “Asian trade” or an “African trade”; it is a world trade. It is an investment in the growing global demand for clean water…and Pall’s stock market performance makes the point.
During the last five years, PLL has charted an independent course that bears little resemblance to the trends of either the S&P 500 index or the MSCI EAFE index of international stocks. In other words, Pall’s share price has tracked the strong performance of its own operations, rather than the performance of any particular national economy or stock market.
Even more dramatic is the two-decade-long divergence between Japan’s Kurita Water Industries and the overall Japanese stock market. Over the last two decades, Japan’s Nikkei 225 index has tumbled 59% in US dollar terms (78% in yen terms!), while the EAFE index of international stocks has scratched out a gain of 109%. But over the same time frame, Kurita has delivered a total return of 200%.
Past performance is no guarantee of future performance, but in this case, we think it will be a reliable hint. For the future — both near term and long term — water purification is one of our favorite supranational investment themes.
Regards,
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