How Thinking Globally Can Boost Your Portfolio

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.

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.

This podcast was recorded on Oct. 19, 2016.

Kristine Harjes: This episode of Industry Focus is brought to you by Rocket Mortgage by Quicken 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 with Motley Fool philosophy, we are long-term, buy-and-hold investors. We just want to find great businesses that we really like and admire and then hold on to them for the long term.

Harjes: Great. One of the things that got me really interested in the different funds was the international exposure of them. The Independence Fund is roughly 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 domiciled outside of the United States. By prospectus, we'll have at least 50% 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 their revenue was actually generated. It's about where headquarters 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 is international exposure?

Travers: Obviously, we're little bit biased about that. It's less about the mathematics of your asset allocation. For us, it's more that we don't just want to be looking in our own backyard. We think there's great businesses everywhere around the world. It's certainly worth the time and effort to 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: Does looking outside of your own backyard present 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 number of companies that are public and available to pick from. And we're spoiled by the transparency and the disclosure. We get quarterly earnings reports. Almost every company is going to do a conference call to 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 do conference calls unless they're big multinationals. The communications 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 that companies have an independent board of directors that oversee what management is doing and that shareholders have a voice in changing things if so needed. That's usually not the case overseas. You'll find a lot of board of directors that are not independent by any stretch of the imagination. You will see companies 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 alongside the government, which also has a stake in the business. So, there's a lot of nuances and things you have to pay attention to. Management quality, making sure they're acting in the interests of all shareholders, is important for us regardless of where a company is, but we're especially mindful of it overseas.

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

Travers: Yeah, I'd put currency as No. 2 on our risks. We invest directly overseas in a lot of cases, so we want to own the companies on their local markets. We think there's benefits of currency diversification. But that's a double-edged sword. We have no ability to claim which direction currencies are going to move. So, sometimes, take Brazil for example in 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 our performance reporting, it can be pretty painful.

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

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

Harjes: But that's what you meant by that?

Travers: Yes, we could buy stocks in London and Tokyo, wherever. But then you're owning them in British pounds or yen, and your results are not just dependent on how well the business is doing and the price you paid for the stuff, but what 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 the big pharmaceutical companies, a Swiss business, paid their dividend in Swiss francs. There was a five-year run where American investors who owned it in francs were doing so great, because the Swiss franc was so strong, and they were getting those dividend payments in a strong currency.

Harjes: You mentioned earlier that there's not a specific mathematical way of thinking about how you should allocate your portfolio toward international investments. Is there a range of a percentage target that you would say individual investors should look toward when they're trying to think about balancing between their domestic country and abroad investments?

Travers: I think that gets to a broader question about somebody's personal circumstances, their own risk 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.? For example, I think about 80% of our podcast listeners are based in the United States. If I had to guess, I would assume that probably the majority of their portfolios are based in the U.S. Once you are not a U.S. resident anymore, how does that change?

Travers: It changes quite dramatically because most other countries around the world have much smaller stock markets than we do here. You could be talking hundreds of companies instead of tens of thousands. And then, typically, those companies are concentrated in whatever industries happened to be dominant in that country. So, maybe it's a natural resource mining heavy country, or, like in the U.K., they're very heavy with financials and industrials. So, maybe you're not able to get the breadth of industry 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's extra important to be actively looking abroad.

Travers: Yeah, I would think so.

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

Travers: NMC Health is a hospital and physician clinic operator in the United Arab Emirates. When we evaluate our companies as a team, we talk about companies across four pillars. Those would be management quality, their competitive advantage, the business economics, and then, is the business going to get stronger over the next 10 years. I had the opportunity to spend a week out in Dubai looking at companies in the Middle East, and NMC Health was one of the businesses I saw. I got to tour two of their facilities, and one that was under construction. I found what they were doing with the hospitals to be pretty remarkable. The backdrop in the UAE: It's a wealthy country with wealthy country healthcare problems. That means high incidence of cardiovascular disease, a lot of obesity, diabetes, and things of that nature. Alongside that, with the rising incidence, the kinds of diseases you've seen the United States, was a country that had massively underinvested in its infrastructure, to the point where they were sending people overseas, mostly to Europe, to get treatment because 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 -- to come in and start building hospitals. NMC started there in the 1970s, but has really accelerated their modern buildings to treat the population 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 a gorgeous building. Anyone here would be happy to 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 to meet the needs of a population that dramatically needs better healthcare and to do it with Western, high-class standards. So then, what that has also enabled is medical tourism to come to a place that just has all these Western doctors, premier facilities. People can come 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. It cost hundreds of millions of dollars to build one. You need 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 profitable and that kind of market than they are here in the U.S.

Harjes: Why do you say that?

Travers: It's a combination of their government healthcare plan, and the people who are there as employees -- it's a highly expat society where people have their own private insurance, so the hospitals are able to charge a price where they get a better margin on the services they're providing.

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. Because everybody'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: But it gets expensive.

Travers: It gets expensive.

Harjes: Right. Another trend we see here is consolidation in the hospital industry and medical providers in general, probably because they're so low margin. When push comes to shove, you're going to operate better if you have that bigger network, and you have a little bit more of a smooth ride between the different bumps that a small provider might see. Is that something you also see with NMC, where they are trying to get bigger and scale up and trying to improve their numbers that way?

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

Harjes: And it's all within the same network.

Travers: That's right.

Harjes: That's great. 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 (ALGN 0.40%). What do they do?

Travers: Align Technology is the maker of the Invisalign tooth 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 as straight as they would have liked, then they use Invisalign instead of deciding to use metal braces. There's a couple reasons behind that. They're more 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 prefer companies with strong competitive advantages. Align gets it on two fronts. They have to do a lot of R&D. They've been doing this for 15 years to build products that actually work, because the dentists won't use them if they don't. Then, there's regulatory approvals that any new company who wants to do this would have to do this as well. So, they've paired those barriers to entry, along with creating a brand around their product. Some of the best companies in the world got there because they have a brand that consumers love, and they just built that out. So, they have multiple angles around their competitive advantage that we really find admirable.

Harjes: Yeah. This really does remind me of a Kleenex or Band-Aid situation. 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 patents out the wazoo covering them, I'm sure, in case a competitor did want to come out. One thing that stood out to me as a potential 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 approve your product. Then, you could basically name your price. The world has changed dramatically. Not just for drugs and medical devices, where Medicare and the insurers are pushing on price. We're moving 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's usually 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're not worried about an insurance company coming to them next year and saying, "You have to lower your prices by 10% or we're not going to cover you." There's so many issues like that affecting lab tests, diagnostic test, medical devices, where Medicare 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 not people can actually afford it.

Harjes: Right. And it seems like, even though it is an elective procedure, people are electing to do it. Their market share is very strong relative to any sort of competitors, because they're practically nonexistent, but in the grand scheme of people who have malocclusion -- which is, I learned, how you say "people with crooked teeth" in fancy medical terms -- they're just scratching 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're just starting education through programs to tell parents, "Look, we've tried this in teens. If you tell them the importance of doing it responsibly, they will actually do that." So, they're starting to get a little more traction in that market, which is a far bigger market than adults.

Harjes: Another element that I can see coming into play here is the aesthetics 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're comparing what band color you want next 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 that it'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: And they 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: Also important to remember. Great. Thank you so much for being here on the show with me today. This has been fun.

Travers: This was a lot of fun.

Harjes: If you 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 interests in this stocks that they talk about, and The Motley Fool may have formal 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!