Southeastern: A Compelling Time to Invest Outside the U.S.

Josh Shores, CFA serves as a principal and director of Southeastern Asset Management, Inc. Mr. Shores has been with the firm since 2007 and joined as senior analyst. He is a C.F.A. charter holder. He received a B.A. in Philosophy and Religious Studies from University of North Carolina in 2002.

He is a manager of the Longleaf Partners International Fund (LLINX).

I spoke with Josh on December 6.

I’d like to start off with the last sentence from your most recent commentary: “Given the deeper discounts and broader opportunity set, the payoff patterns outside of the U.S. could be particularly compelling.” The mix of industries, particularly in developed Europe and Asia, explain at least some of the differences in valuations from those in the U.S. What else are you seeing outside the U.S.?

As you know, we very much view the world from a bottoms-up point of view. While we'll look at the macro and top-down environment, and the multiples on market indices, we fully recognize that there are others who are much better placed to make a call on that. We question how reliable making those type of macro calls can be.

We're purely looking bottoms up, as would a private equity investor, at what companies are worth, how competitively advantaged they are and how durable that is. Are the people good operators and capital allocators? And can we buy it at a sufficient margin of safety?

When we do that, we end up with hundreds and hundreds of appraisals on different companies across the world. We aggregate those on an equal-weighted basis, and say “Okay, here's roughly where these regions – Europe, Asia Pacific broadly, the U.S., the Americas ex-US – are trading.” On that metric, we compare cheapness to full value.

That tends to be not overly dissimilar from the top-down approach, but it washes through most of the noise. Because when we do this on a bottoms-up basis, the $8 billion cap is equal weighted with the $800 billion cap. We're not trying to outsmart the index methodology per se; we're just looking for great bottoms-up best ideas and where we should allocate our time.

On that perspective, the U.S. is fully to overvalued. That hasn't changed at all, despite the volatility in recent weeks – severely so, in some regards. Europe has gone from being about fairly valued over the last six months. But with a 10% to 20% country-by-country retracement, it is slightly undervalued. The Asia Pacific region is broadly the cheapest in the world, for understandable reasons from a bottoms-up point of view. There's a lot of opportunity in that environment.