The idea that an international fund needs “boots on the ground” to successfully pick foreign stocks is a flat-out fallacy, said Paul Bouchey, chief investment officer at Parametric. “The vision of a manager traveling to exotic locales, visiting factories with a hard hat on, and finding opportunities that other analysts have overlooked is a fallacy,” said Bouchey. “With over 70 liquid equity markets in the world, you would need a lot of boots on the ground to realize this romanticized vision.” Bouchey said that private equity deals, infrastructure projects, and private real estate investments require local knowledge. For investing in stocks globally, however, boots on the ground are both costly and unnecessary, in his view. Another international investing misconception in Bouchey’s opinion is that fund managers should avoid low quality companies, especially so-called ‘state-owned enterprises’, or SOEs. In his estimation, usually it is the cheap stocks of unattractive looking companies that have better return prospects and it is not immediately obvious that SOEs are bad companies that are destined to have bad returns in the future. “State-owned enterprises are often accused of being bureaucratic relics of the communist era. However, many of them enjoy monopoly powers and are implicitly or explicitly backed by the government,” said Bouchey. And while it sounds comforting to be invested in stocks that are domiciled in countries with a growing GDP, there are no strong linkages between GDP growth and stock market returns, according to Bouchey. As a result, understanding the macro-economic situation in countries is not vital for investing in them. “Macro-economic forecasts, like other types of forecasting, have a very poor track record at timing markets and producing consistent excess returns,” said Bouchey. “Econometric models are fairly good at predicting risk and some macro models may be useful for currency trading-but for an equity investor, any type of market timing is more likely to increase trading costs and risk, not returns.” Finally, Bouchey said it is no huge help for international investors to focus on national politics and the media. “You might think a presidential impeachment would be bad for the stock market, but Brazil’s recent impeachment was followed by more than a 20% return in Brazilian stock prices,” said Bouchey. “Politics creates noise in stock prices. Attempting to time markets based on political analysis or by reading newspapers is a fruitless endeavor.”
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