Insights into International Equity Strategy

In this episode of Financial Perspectives, Tanya Suba-Tang sits down with Ken Ryan, CFA—Portfolio Manager of the Parnassus International Equity Fund. Together, they explore the evolving landscape of global equity investing and how a values-driven approach can uncover opportunity in unexpected places.

Ken shares insights from his experience at Parnassus, WCM Investment Management, and Dodge & Cox, covering everything from managing risk in international markets to integrating sustainability principles without compromising returns. Listeners will gain valuable context on how to navigate today’s geopolitical and economic challenges while maintaining a long-term perspective.

Whether you’re an international equity enthusiast, a values-driven investor, or simply want to learn from a seasoned global strategist, this episode offers clarity and conviction in an increasingly complex investing environment. 

If you'd like to learn more about the show, have a topic or speaker to suggest, or would like to leave us a comment, email podcast@cfa-sf.org.


This podcast is produced by CFA Society San Francisco, a not-for-profit professional association, providing professional learning and career resources to over 13,000 investment industry professionals worldwide. To learn more about CFA Society San Francisco, visit our website or connect with us on LinkedIn.

The information contained in this podcast does not constitute financial or investment advice. Please consult your own financial advisor for information concerning your specific situation.

Chapters

• 0:00 Parnassus Investment Philosophy Overview
• 2:58 International Equities: Historical Context & Performance
• 5:42 Current International Investment Opportunities
• 9:14 Stock Spotlight: Willis Towers Watson
• 13:15 Stock Spotlight: 3i Group & Action
• 20:27 Geopolitical Environment & International Outlook

Transcript

Lindsey Helman (Announcement)

Hello and welcome to Financial Perspectives, a CFA Society San Francisco podcast where we interview and discuss trends with leaders from across the investment and finance industry. This month, our host, Tanya Suba-Tang, Membership Director with CFA Society San Francisco, had the pleasure of speaking with Ken Ryan, CFA, Portfolio Manager and Senior Analyst at Parnassus Investments. Listen in as they discuss balancing opportunity and risk in international equity markets.

Tanya Suba-Tang (Host)

Hi, Ken. Thanks so much for joining us today. How are you? 

Ken Ryan (Guest)

Great. Great, Tanya. Thanks for having me on the podcast today. Really excited to be here. 

Tanya Suba-Tang (Host)

I am so excited to jump into our conversation. We're going to be talking a lot of interesting international things. So jumping right into my first question for you, for any listeners who might not be familiar with Parnassus, Can you just briefly give us an overview of the firm, its investment philosophy, and process? 

Ken Ryan

Absolutely. Thank you for that. So Parnassus is a long-term focused investment manager based here in San Francisco. We're known for stock picking and for sustainable investing. We were actually one of the first responsible investing firms in the industry, and we've now been considering sustainable factors in our investment research for over forty years, you know, all the way dating back to our founding in 1984. So today we manage over forty billion in assets. We're really passionate here about finding stocks we think can outperform because they're high quality, good companies. The simple idea here at Parnassus is that good companies make good investments. We build concentrated portfolios that represent our highest conviction for these quality companies that we think will provide strong risk adjusted returns over the long term. 

So to dig a little deeper in how we do things, we have four key pillars here at Parnassus backing the quality standards in our investment philosophy. We look to identify high quality companies that have increasing relevant products and services, Durable competitive advantages, strong management teams, and sustainable business practices. And we look to own those stocks for a long period of time at attractive valuations. The culture here at Parnassus is very collaborative. We strongly believe we get the best outcomes by working together. So we have a single investment team here that supports all the strategies, works on everything together and really looks to generate those long-term outcomes. The team here at Parnassus, we're constantly on the hunt for the best businesses across the world. We perform deep research to understand the businesses relative to their peers, relative to the industry they operate in and relative to its own history. And when we find those high quality companies, we look to own them for a long period of time. 

Tanya Suba-Tang (Host)

So knowing now all this, given your role as portfolio manager for the Parnassus International Equity Fund, I'd love for you to talk about the performance of international equities this year. And why international equities have come up this year as an opportunity for investors. 

Ken Ryan

Yes, I'd be more than happy to dive into that. Thanks. Diversifying investments and diversifying portfolios with international exposure, it's certainly been a hot topic this year. I think the way to dig into it, Tanya, is to really start with some historical context. around international and global diversification. In fact, a lot of the key reasons for investors diversifying globally, there's reasons that remain the same for many years. First, you get exposure to a wide variety of economic and market cycles. Europe, Asia, North America, these large global regions don't always march to the same beat and you want exposure to each of them. When they're doing well, many investors also succumb to what's called home bias risk, which in this case means us investors overweight their us equity exposures. You know, you're more biased to own a lot more of what's in your home market. And when you zoom out on this, over 30% of global equities market cap and over 70% of global GDP is actually outside the US and really important to get exposure to. 

What's more important to us here at Parnassus is the unique opportunities that exist in the space. just as we see in the U S we see plenty of great businesses all over the world that we can own for a long period of time. So valuation. Valuation of the markets US versus a lot of these other markets globally, they also change with time. Just as someone to want to buy a stock whose valuation looks attractive relative to other opportunities. Monitoring international valuations relative to the US can also highlight when the timing may be favorable to diversify.

And last key reason here, currency exposure. It matters for all investors. Us as U.S. investors care about U.S. dollar returns. And when the dollar is weakening against foreign currencies, international stocks generate stronger dollar returns. To make things simple with currency, Having exposure to international is more important for US investors when the dollar is weakening. When you zoom out, there have been long periods of time where exposure to international equities has paid off and zooming out is really important. International equities outperformed the US from 2000 to 2010 and throughout most of the seventies and eighties. The long-term context is important because these cycles are indeed very long. With international equities often outperforming U.S. equities for five to ten year periods at a time. 

As we know so well, The past decade hasn't been one of these periods. U.S. markets have outperformed incredibly well in recent times. And we all know the story. A small number of mega cap tech stocks have driven huge returns. If you owned any of these companies or even the small group, You've done quite well. And I think today, fast forwarding to today, it's really important for investors to first have this historical context. Now let's dig into what we're seeing now. So far this year, many of the reasons for global diversification are playing out. And I think the question we should be asking is not what's driven, you know, four or five months of returns, but, but more. Whether or not we could be jumping into another one of those five to ten year periods where it's really important for investors to have that global diversification.

To expand on some of the historical points, you know, what we're seeing today in terms of global markets. Europe now is planning to significantly increase fiscal spending in the years ahead, and that's creating a lot of hope for strong economic growth for the entire. U.K. and European region. Estimates are pointing to the potential for more than a trillion euros worth of investments over the next decade. And this is from a region that historically not created fiscal stimulus to this regard. Japan, another very interesting one. Japan's in the middle of a multi-year journey of improving corporate governance and improving returns to equity shareholders.

I was actually in Japan a couple of months ago visiting companies. And what you see today is almost all of these companies in Japan you meet with, they're all talking about dividends, they're talking about share buybacks. They're talking about return on equity. I'll tell you, Tanya, if you went to Japan five years ago and asked these companies the same thing, these words were not in most vocabularies of most management teams five years ago. It's changing a lot in that that sets the seeds for opportunity. If we look at the valuation gap us versus international. It's widened in recent years. It's at historic highs today with international stocks. By that, I mean international stocks are currently trading cheaper relative to the U.S. than they have in a long period of time. And the dollar is weakening. Against the euro, against the yen and against other global currencies. This is a positive. This is a positive for many international companies and for us investors focused on dollar returns. And I'll, wrap up here and say. At Parnassus as a firm focused on bottoms up stock picking, the opportunity set on a stock specific basis matters. And we do see plenty of opportunity today in the international space to own really great businesses at attractive valuations. You know, we are very long term focused here, three to four year time horizon. Our longer term funds have many companies they've held even longer than that.

I want to wrap up this by saying the long-term time horizon of Parnassus aligns well with the long-term cycles we see when comparing us to international. I think the backdrop for international is favorable here. It's favorable and for investors looking to diversify and take advantage of some of the opportunities we see.  

Tanya Suba-Tang (Host)

Thank you, Ken, for all those points. Now, one of the points you did hit was the attractive valuations of international equities. Is there a stock or two that helps bring this benefit to life? 

Ken Ryan (Guest)

Yeah. Absolutely, I think Parnassus being a stock picking focus firm, I'll try to limit to two but just know we could go on all day about the companies we own here and the companies we love here so. To dig into two, I'll start with Willis Towers Watson. So some may heard this name before it up. They're one of the five main players in the global insurance brokerage and human capital advisory industry. What that means simplistically. Willis Towers Watson helps companies take care of their employees and protect their businesses from big risks like lawsuits or natural disasters. It's a relatively concentrated industry where You know, the large five players benefit from things like high client retention, sticky multi-year contracts, skill driven advantages. Customers rely heavily on brokers like Willis Towers to want to understand their needs and to navigate the complex landscape of insurance to find very Customer specific solutions. And really for a lot of these customers, once you find a good insurance broker that you like working with, you tend to stick with them for a very long time. the mission critical nature of. Risk management and benefits consulting creates switching costs, creates pricing power. And these are just two pieces of strong evidence that the leading players in this space really benefit from strong mode sources, which As you know, is one of the pillars we look for here at Parnassus.

So Willis-Towers-Watson specifically, they're on a multi-year cost optimization and restructuring plan. It's a company that was formed through a very large merger in 2016 of Willis and Towers Watson. And these two companies even leading up to the merger, they've done a lot of their own M&A in the decade leading up to the transaction. So the positive of this, of course, was they created one of the largest players in the industry. they did so with a lot of complexity and cost of an organization that had been built through a lot of deals over time. And while, you know, this happened almost ten years ago at this point, It set the stage for many years of improvement opportunity.

So what that opportunity looks like today, it's, it's steady path of things like eliminating redundancies and business functions and technology systems centralizing shared services. Standardizing operations and putting new practices in place to further leverage their scale. they're multi-year into this journey and we see multiple years left to continue getting more efficient and really becoming a better business. So when you look at margins, we expect them to continue moving toward peer levels over time, meaningful operating leverage off solid top line growth. The company has also been divesting lower margin operations and rationalizing its footprint. Which will help margins even further. To hit on another one of our pillars, we like to align with strong management teams, and we believe in the leadership at Willis Towers Watson, and this drives further confidence they'll succeed, not only in this midterm turnaround, but Also in continuing to drive shareholder returns through dividends and buybacks.

I'll finish on valuation. Willis Towers Watson and it's one of the other five large players Aon, they're, they're the two companies here that are headquartered outside the US. And while the headquarters may be different, all five of these leaders are global businesses. the interesting part is both Willis Tower, Watson and Aon traded a discount to the U S listed peers. And our analysis shows that. Willis Towers Watson has the most attractive valuation of the group. So to wrap up really with Willis Towers, it's the pillars that matter to Parnassus. It's mode, relevancy, management, sustainability, and valuation that. You know, lead us to this great opportunity.

We'll turn next to 3i group. this is one I have a fair amount of history with and a business I Truly love talking about so 3i group itself is a UK base listed private equity firm. what we'll talk about today mostly is action. action is one of their key holdings by our calculations. Over 70% of 3i's net asset value is generated from this company, Action.

So, for those who don't know, what is Action? Action is a fast-growing non-food retailer that offers a changing assortment of products at very low prices. You know, think household goods, personal care items, stationary toys, garden items. Almost anything you need at your house. That's not food. What makes action different is they provide customers with a treasure hunt experience. So, Think about going to a store every week and, a very large percentage of the items you find in the store change every single week. So while you have all your basic needs, you know, things you need around the house on a constant basis, Every time you go, there's something new to look at. there's new products in store. They're constantly switching products in and out, depending on how well they're working. And of course, back to the price proposition. These products are prices you cannot find anywhere else. So if you want a good deal, you're going to go to action.

I think for, people in the US, you could sort of think of it a little bit like a Costco with a treasure hunt experience. not quite the warehouse. But a lot of items that you really want to jump on where you're like, well, I really wouldn't see that price anywhere else. so. We see action as one of the best consumer investments available today across the international space. You know, they have the constantly rotating skews, much lower prices than competitors. Every new store they open, they make their money back in less than twelve months. That's very impressive for this industry.

And what's also interesting, a characteristic we haven't really seen anywhere else, Their store box is standardized and somehow this exact same concept, exact same SKUs, exact same layout, exact same proposition. It's gaining traction in a meaningful way in ten plus different countries throughout Europe. And when you think about Europe, a region with different languages, different cultural preferences, different retail concepts, different competitor sets. This action concept is resonating strongly in every single country and getting huge traction in a meaningful way. And that makes it very, very interesting. I'd say the other part. Action and a part we like both on the mode perspective relevancy perspective and sustainability perspective actions very keen on a lying strongly with their customers. And aligning strongly with their belief that any scale benefits they get should be passed back to the customer in form of lower prices.

So what you see is that this price gap not only exists today, but as action is growing far faster than their competitors. And as they leverage this belief that scale should be passed to customers, the price gap versus competitors actually grows over time. And they actually disclose how big that price gap is and how that's changing. So as a consumer, You not only love the treasure hunt experience, but also when you monitor this over three years, you're like, well, I'm actually saving more and more money going to action. And when you saw inflation get pretty wild as we did the past few years. You saw competitors raising price 8%, 9%, 10%. Action was actually lowering their prices. So think about that for a second. And, you know, that's what you get through this investment. you may imagine, a concept like this with, you know, resonating in ten countries growing very fast, the runway for store expansions Huge action believes they can more than triple their store count from here, assuming they don't expand any additional countries and the perspective of, you know, this probably could work in a lot of countries and maybe that runway is even longer. Same store sales growth, metric retail investors, anyone who invests in consumer will know. Same store sales growth continues to trend in the six to 9% range. Very good for any retailer. It's been as high as double digits in the past and could go back there.

And, you know, as they continue to leverage scale and cost advantage versus competitors and make their price proposition more attractive to consumers. This should be one of those investments with a very long runway that can compound for very long periods of time, which, of course, we love. Now, the valuation. The attractive valuation for 3i stems Partially from its unique structure, it's a publicly listed, publicly traded, closed-end private equity fund with one core asset, more or less, the one core asset being action. And we believe that the company is still overlooked because of this. And in fact, if you just listen to that last sentence and try to decipher it, it probably was a little confusing and that's probably why it's still overlooked.

So. The simple view on valuation over time is that 3i's valuation, which is pretty cheap, will converge with a true value of action, which is, you know, we believe far higher than most are giving it credit for. And the company also owns another. twenty to thirty smaller businesses as it is a private equity firm. And, you know, I think if two things happen, one, the value of action continues to grow and compound to investors recognize this a little more and three. In a very bullish scenario, maybe one or two more of these twenty to thirty other companies action owns, you know, emerges as another crown jewel. I'll finish up on management. This is a well aligned management team. We like a lot. the CEO took over the business in a pretty rough situation about fifteen years ago and really turned it around, really doubled down on action as has let action run its own course. Has let action really blossom as a phenomenal business. And CEO has also done a great job nurturing the rest of the portfolio. So this is a company we trust. It's a company with great assets as some talked about, and it's a company we believe. We'll continue to create a lot of value for us as shareholders.

Tanya Suba-Tang (Host)

Thank you so much for sharing such detailed information. now before wrapping up, I really was hoping we touched a little bit more on development. as everybody probably knows, a lot of attention has been Devoted to global trade wars in recent months. Now, how has the current geopolitical environment impacted your outlook for the asset class?  

Ken Ryan (Guest)

Yes, very. Another very topical question, Tanya Thanks a lot. So the geopolitical environment today is undeniably complex. Anyone who's lived through the past four months knows that quite well. We have trade tensions, realignment in global supply chain. War driven energy disruption, potential for rising protectionism, these sorts of things.

For international equity investors, it's not just a risk. It's important to frame this as also an opportunity. We're seeing an unprecedented area of shifting trade alliances. Many non-U.S. companies are finding new regional growth avenues and being increasingly insulated from U.S.-centric policy risks or tariff regimes. It's really important to point out for investors listening that sitting in the U.S., it's a very U.S.-centric discussion. It's very centered on tariffs and how that's going to influence the U.S. I can pull up my portfolio right now and just point out one company at a time that doesn't have any exposure to tariffs. I can point out companies that have no US revenue whatsoever. This is the kind of thing that exists in the international space.

The other thing I'd say about, you know, the world right now, global trade war is geopolitical environment. Just remember our examples from earlier. What we're seeing in Europe, this unprecedented level of investment, this is a huge opportunity stemming out of what we're seeing. This is the US saying, Europe, we're probably not going to work with you in the same way in the future that we have in the past. And Europe saying, okay, we're going to spend a lot more. The companies in the international space benefit a lot from that spending.

You know, remember Japan. You know, this is, this is a multi-year period. Huge shift in the way that these companies approach capital allocation, corporate governance and returns to shareholders. And these changes continue to move unabated by the news headlines we see on a daily basis. And remember, currency, it's working in the benefit to U.S. investors right now. Having exposure to international currencies and a weakening dollar can be a really good thing. And also, with this opportunity set, It's available at a very cheap valuation relative to U.S. equities.

So I think to sum it up, as I see the same daily headlines you see and I see a lot of change in the world, I also See it in a way that there's a lot to be excited about and a lot of opportunity for people looking in the international space. And for us, again, at Parnassus, a lot of times we boil this down to the company specific level and we see a lot of U.S. companies, non-U.S. companies with strong balance sheets, global brands, durable business models, great management teams, sustainable business practices, and that gets us excited every day.

So to wrap it up. We're relatively bullish on international equities, even as all of these changes continue to play out. Our focus here on Parnassus remains as it's always been. We look to identify companies with lasting competitive advantages and our long-term time horizon. Three to four years, sometimes even longer. We can look past the short term noise. We're looking at a lot of these companies, not only saying how could a variety of scenarios of tariffs and trade wars play out for this company, but also importantly, What does the company look like in three to four years? And is this actually a really high quality company that can take advantage of the current environment and current opportunities to widen its lead, to get better than peers over time.

Last point, in our view, geopolitics, it's not just shaping headlines. It's reshaping the map of global equity leadership. And for those willing to look beyond us borders, the next chapter of opportunity, it's, it's really being written today. It's being written right now. So. I'll wrap up there, Tanya. And again, really appreciate the time.

Tanya Suba-Tang (Host)

Wow, that was a boatload of information. Thank you so much for sharing all of that insight. Ken, it was really informative and I hope our listeners got a few takeaways from that. So thank you again for joining me. I really enjoyed talking to you and I hope we can catch up in the future and see where we're at after, you know, the next year when it comes to the geopolitical environment.  

Ken Ryan (Guest)

Absolutely. I look forward to it and thanks again for the time.

Lindsey Helman (Announcement)

Thank you to this month's guest, Ken Ryan, for sharing his insights into international equity markets. Join us next time for another Financial Perspectives episode airing on the last Tuesday of the month. 

We love hearing from our listeners and want to hear what you thought of this episode and any topics you'd like for us to cover next. Send us a message using the link at the top of each episode description or email us at podcast at cfa-sf.org. Thank you for being a dedicated listener. 

This podcast is produced by CFA Society San Francisco, a not-for-profit professional association providing professional learning and career resources to over 13,000 investment industry professionals worldwide. To learn more about CFA Society San Francisco, visit our website at cfa-sf.org or connect with us on LinkedIn.