How Thinking Globally Can Boost Your Portfolio

By Markets Fool.com

In this week's episode of Industry Focus: Healthcare, Kristine Harjes talks with special guest Charly Travers,a portfolio manager for The Motley Fool's Great America Fund, Independence Fund, and Epic Voyage, to talk about the pros and cons of investing internationally.

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Listen in to find out some of the most important things to keep in mind when investing in a foreign company, how currency changes might affect an investment's outcome, and more. Then, the pair talks about two healthcare companies -- one in the U.S. and one outside -- that are piquing Charly's interest for the portfolios and why the folks at Fool Funds are so excited about them.

A full transcript follows the video.

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This podcast was recorded on Oct. 19, 2016.

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Kristine Harjes: This episode of Industry Focus is brought to you by Rocket Mortgage byQuicken Loans. Rocket Mortgage brings the mortgage process into the 21st century with a fast, easy, and completely online process. Check out Rocket Mortgage today at quickenloans.com/fool.

Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It's October 19th, and I'm your Healthcare show host, Kristine Harjes. Today, I have a special guest in studio with me. Representing Fool Funds is Charly Travers, who is a portfolio manager for the Independence Fund as well as the Great America Fund. Charly, I'm thrilled to have you on the show. Thanks for being here.

Charly Travers: I'm really excited to be here.

Harjes: For our listeners who might not be familiar with Fool Funds, can you give some background on what you and your team do?

Travers: We have three mutual funds. One is a global all-cap go-anywhere fund, that's the Independence Fund that you mentioned. Our second fund is the Great America Fund, which is a domestic small and mid-cap fund. Then, we have a third fund called Epic Voyage, which is completely international. Consistent withMotley Fool philosophy,we are long-term, buy-and-hold investors. We just want to find great businessesthat we really like and admire and thenhold on to them for the long term.

Harjes: Great. One ofthe things that got me really interested in the different funds wasthe international exposure of them. The Independence Fund isroughly 50% non-U.S.investments. Is that right?

Travers: Yes,that's right.

Harjes: So, what exactly makes something a non-U.S. investment?

Travers: For us,it is a company that is domiciledoutside of the United States. By prospectus, we'll have at least50% of our holdings be U.S.companies, and after that,we can go pretty much wherever we want. It's a lot of fun.

Harjes: So,it doesn't necessarily matter what exchange they're trading on or where theirrevenue was actually generated. It's about whereheadquarters is.

Travers: Yeah,just keep it simple that way.

Harjes: Interesting. OK. So,when you're thinking about building a portfolio,as an individual investor, how important isinternational exposure?

Travers: Obviously,we're little bit biased about that. It's lessabout the mathematics of your asset allocation. For us, it's more thatwe don't just want to be looking in our own backyard. We think there'sgreat businesses everywhere around the world. It's certainly worth the time and effortto go find them. We have a lot of great companies here in America,but there's also a lot more out there as well.

Harjes: Doeslooking outsideof your own backyardpresent any sort of unique challenges?

Travers: I think, in the United States,we are spoiled by a lot of things. We are spoiled by the sheer numberof companies that are publicand available to pick from. And we'respoiled by the transparency and the disclosure. We getquarterly earnings reports. Almost every company is going to do a conference callto talk about the results. In a lot of cases, you can get them up on the phone,if you felt like it. When you're investing overseas,it's an entirely different animal. A lot of companies report twice a year. A lot of them do not doconference calls unless they're big multinationals. Thecommunications on their website may or may not be in English. If it's not in English, that's very difficult.

Then,corporate governance is not the same. We take it for granted here thatcompanies have an independent board of directors thatoversee what management is doing and thatshareholders have a voice inchanging things if so needed. That's usually not the case overseas. You'll finda lot of board of directors that are notindependent by any stretch of the imagination. You will seecompanies where the founding family --it's essentially a public, family run business,where they have a huge ownership stake and,basically, what they say goes. So,either you're on board or you're not. Then,in some cases, you're investing alongsidethe government, which also has a stake in the business. So, there's a lot ofnuances and things you have to pay attention to. Management quality, making sure they'reacting in the interests of all shareholders, isimportant for us regardless of where a company is, but we'reespecially mindful of it overseas.

Harjes: That'sreally interesting. Is currency another risk to add to that equation?

Travers: Yeah,I'd put currency as No. 2 on our risks. We invest directlyoverseas in a lot of cases, so we want to own the companieson their local markets. We think there's benefits of currency diversification. But that's a double-edged sword. We have noability to claim which directioncurrencies are going to move. So, sometimes,take Brazil for examplein recent history,when that currency moves against you,you could be doing great in the local market,and then, when the results are translated to dollars for ourperformance reporting, it can be pretty painful.

Harjes: That'sinteresting. Just to clarify what you mean by that,GlaxoSmithKlinetradeson the London Stock Exchange,as well as over here on the New York Stock Exchange. So,you guys would pick the London versionto buy shares in?

Travers: That's a case-by-casebasis. But in certain cases...

Harjes: Butthat's what you meant by that?

Travers: Yes,we could buy stocks in Londonand Tokyo, wherever. But then you'reowning them in British pounds or yen, and yourresults are not just dependent onhow well the business is doing and the price you paid for the stuff, butwhat the currencies are doing as well. That's something we have no control over. Sometimes it's frustrating. Sometimes it works to our advantage.

Harjes: Right,and I assume that affects the dividend payment as well.

Travers: Right. There were years,Novartis, one of thebig pharmaceutical companies, a Swiss business,paid their dividend in Swiss francs. There was a five-year run whereAmerican investors who owned it in francs were doing so great, because the Swiss franc was so strong,and they were getting those dividendpayments in a strong currency.

Harjes: Youmentioned earlier that there's not aspecific mathematical way of thinking abouthow you should allocate your portfoliotoward international investments. Is there a range of apercentage target that you would say individual investors should look towardwhen they're trying to think aboutbalancing between their domestic country and abroad investments?

Travers: I think that gets to a broader questionabout somebody's personal circumstances, their ownrisk tolerances, what their objectives are for their portfolio. We're not financial planners,so that kind of advice is really not something we give out on an individual basis.

Harjes: Right,so it really is up to you.

Travers: Yes. Within our fund, we're roughly 50-50.

Harjes: Interesting. Do you think that would change if you were ex-U.S.? Forexample, I think about 80% of ourpodcast listeners are based in the United States. If I had to guess,I would assume that probably the majority of theirportfolios are based in the U.S. Once you are not a U.S. resident anymore,how does that change?

Travers: Itchanges quite dramatically becausemost other countries around the world havemuch smaller stock markets than we do here. You could be talkinghundreds of companies instead of tens of thousands. And then,typically, those companies are concentrated inwhatever industries happened to be dominantin that country. So, maybe it's a natural resource mining heavy country, or, like in the U.K., they'revery heavy with financials and industrials. So,maybe you're not able to get the breadth ofindustry exposure that Americans take for granted. If you want that in your portfolio,you have to be looking in bigger waters, I think.

Harjes: So, at that point, it'sextra important to be actively looking abroad.

Travers: Yeah,I would think so.

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Sincethis is the Healthcare show,we wanted to talk a little bit about somespecific healthcare holdings in the Fool Funds'portfolios andwhat exactly drew you to those companies. Since we were just talking about international stocks, let'sstart first with a pick from the Independence Fund. This is,indeed, one of the largest holdings in the fund of healthcare. This isNMC Health(LSE: NMC.L). Can youstart off with a basic description of what they do?

Travers: NMC Healthis a hospital and physician clinicoperator in the United Arab Emirates. When weevaluate our companiesas a team,we talk about companies across four pillars. Those would be management quality, theircompetitive advantage, thebusiness economics, and then, is the businessgoing to get stronger over the next 10 years. I had the opportunity tospend a week out in Dubailooking at companies in the Middle East, and NMC Health wasone of the businesses I saw. I got to tour two of their facilities, and one that wasunder construction. I found what they were doing with the hospitals to be pretty remarkable. Thebackdrop in the UAE: It's a wealthy country withwealthy country healthcare problems. That means high incidence of cardiovascular disease,a lot of obesity, diabetes, and things of that nature. Alongside that, with therising incidence, the kinds of diseases you've seen the United States, was a country that hadmassively underinvested in its infrastructure,to the point where they were sending people overseas,mostly to Europe, to get treatmentbecause they just didn't have the facilities at home.

So,they had a lot of government-owned hospitals,and what they did was encourage private sector -- one of those companies was NMC Health -- tocome in and start building hospitals. NMCstarted there in the 1970s, but has reallyaccelerated their modern buildings to treat thepopulation there. We saw their maternity hospital. The maternity wards there --it's a growing population -- are bursting at the seams, so they built a modern,state-of-the-art facility with 100 beds. It's agorgeous building. Anyone here would be happyto be in there. And then, they built another specialty hospital they can do oncology, general surgery,they have a NICU for little kids. So, they're able tomeet the needs ofa population that dramatically needs better healthcare and to do it withWestern, high-class standards. So then, what that has also enabled ismedical tourism to come to a place that just hasall these Western doctors,premier facilities. People cancome in there, get treated,take a nice vacation in Dubai,and then be on their way. So,as far as a competitive advantage,there's only a couple hospitals that do this. Itcost hundreds of millions of dollars to build one. Youneed the blessing of the government. So,once they're in and up and running,it's a really nice business. Over there,the payment system makes it so that hospitals are much more profitableand that kind of market than they are here in the U.S.

Harjes: Whydo you say that?

Travers: It's acombination of their government healthcare plan,and the people who are there as employees -- it's ahighly expatsociety where people have their own private insurance,so the hospitals are able to charge a price wherethey get a better margin on the services they'reproviding.

Harjes: Typically, in the U.S.,you do see pretty low margins for hospital operators. That's not as much of an issue over there?

Travers: No, not at all. Becauseeverybody's covered with insurance,so they're not having to treat anybody who walks in the door regardless of ability to pay -- which,I think we should do that here, it's the right thing to do...

Harjes: Butit gets expensive.

Travers: It gets expensive.

Harjes: Right. Another trend we see here isconsolidation in the hospital industryand medical providers in general, probably because they're so low margin. Whenpush comes to shove, you're going to operate better if you have that biggernetwork, and you have a little bit more of a smooth ridebetween the different bumps that a small provider might see. Is thatsomething you also see with NMC, wherethey are trying to get bigger and scale up andtrying to improve their numbers that way?

Travers: They havethe two big crown jewel hospitals that I talked about,but then they have a feeder system of all these doctors' offices and smaller, 40 bedhospitals that are spread like a spider webthroughout the country. People go to thoseas their first call when they get sick,and then if they need the high-end facilities, they getfunneled into the centralized, big hospitalswith all the bells and whistles. So,they have a small network ofinexpensive locations and doctors to bring people in the door, then when they find out they need legitservices because they're really sick, then they get pushed up the funnel, so to speak.

Harjes: Andit's all within the same network.

Travers: That's right.

Harjes: That'sgreat. So,that's the pick we wanted to talk about internationally. Let's go back to the States for a pick from the Great America portfolio:Align Technology(NASDAQ: ALGN). What do they do?

Travers: Align Technologyis the maker of the Invisaligntooth alignment system. They are the alternative to metal braces. Their core market,historically, has been adults who have decided at some point in their life that their teeth were not asstraight as they would have liked, then they use Invisaligninstead of deciding to use metal braces. There's a couple reasons behind that. They'remore comfortable to wear,there's no restrictions on the types of food you can eat,you can take them out a little bit at night if you feel like it,and they're basically invisible -- for some people, that's a concern.Invisalign is far and away the market share leader there. Speaking of, we prefercompanies with strongcompetitive advantages. Align gets it on two fronts. Theyhave to do a lot of R&D. They've beendoing this for 15 years to build products that actually work,because the dentists won't use them if they don't. Then, there'sregulatory approvals thatany new company who wants to do this would have to do this as well. So, they've paired thosebarriers to entry, along with creating a brandaround their product. Some of the best companiesin the world got there because they have a brand that consumers love, and they just built that out. So,they have multiple angles around theircompetitive advantage that we really find admirable.

Harjes: Yeah. This really does remind me of a Kleenex or Band-Aidsituation. You think,clear dentistry orthodontic equipment --I don't even know how to say it in a generic way. You think Invisalign -- that is the brand with the sticking power.And, of course, they have patentsout the wazoo covering them,I'm sure, in case a competitor did want to come out. One thing that stood out to me as apotential problem for this business would be insurance coverage. Is that an issue to look out for? And how have they met that challenge?

Travers: I'll step back for a little bit. When I first got started following healthcare about 15 years ago, all you had to worry about was whether or not the FDA was going to approveyour product. Then,you could basically name your price. Theworld has changed dramatically. Not just for drugs andmedical devices, where Medicare and the insurers are pushing on price. We'removing to a world of value-based pricing. So,when you look at a company like Invisalign, it's generally not covered by an insurance plan. It'susually about a $5,000 procedure that someone paid for out of pocket. There's a pro and a con to that. The pro is, they set their own pricing, and if someone agrees to pay it, they get it. They'renot worried about an insurance company coming to them next year and saying, "Youhave to lower your prices by 10% or we're not going to cover you." There'sso many issues like that affectinglab tests,diagnostic test, medical devices, whereMedicare and the insurers are pushing them on price,and they have no pricing power. A company like Invisalign has pricing power. But,on the flip side, they have to worry about whether or notpeople can actually afford it.

Harjes: Right.And it seems like, even though it is an electiveprocedure, people areelecting to do it. Their market share isvery strong relative to any sort of competitors,because they're practically nonexistent, but in the grand scheme ofpeople who have malocclusion -- which is, I learned, how you say "people with crooked teeth" infancy medical terms -- they're justscratching the tip of that population.

Travers: Right. So,as I mentioned, their core market, historically, has been adults,because if it's your mom or dad and it's a $5,000 for the procedure,you might do it for yourself. For your 15 year old who might lose the aligners or not use them properly, and the treatment doesn't work, that's a higher bar to get through. So, they'rejust starting education through programs to tell parents, "Look,we've tried this in teens. If youtell them the importance of doing it responsibly, they willactually do that." So,they're starting to get a little more traction in that market, which is a far bigger market than adults.

Harjes: Anotherelement that I can see coming into play here is theaesthetics of it. When you're an adult, you don't want to get braces,because you look around and nobody else has braces. But,when you're a kid, everybody's got braces. You'recomparing what band color you wantnext with your best friend, because that's just how it goes when you're in middle school. I could see it being a little bit more difficult to convince parents thatit's worth the added expense to get these nice-looking clear ones,when the kids might not really care. But I can also see, over time, that becoming a little bit trendier, to go toward this clear, better-looking feel.

Travers: Andthey are more comfortable,and you don't have to alter what you're eating as well. So I think there's two advantages there,regardless of the person's age.

Harjes: Alsoimportant to remember. Great. Thank you so much for being hereon the show with me today. This has been fun.

Travers: This was a lot of fun.

Harjes: Ifyou want to read more from Charly Travers, you can go to foolfunds.com and sign up for the Declarations newsletter,which is free. It comes monthly from the Fool Funds team. As always,people on the program may have interestsin this stocks that they talk about, and The Motley Fool may haveformal recommendations for or against,so don't buy or sell stocks based solely on what you hear. For Charly Travers, I'm Kristine Harjes. Thanks for listening and Fool on!

Charly Travers owns shares of GlaxoSmithKline. Kristine Harjes has no position in any stocks mentioned. The Motley Fool recommends Align Technology. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.