Over the past five years, dozens of country- and region-specific foreign market exchange-traded funds (ETFs) have emerged on the scene.
It's a wonderful development, and more investors should be embracing these funds as they enhance their level of global exposure.
But the trouble with the ETF approach is self-evident. These funds buy a basket of leading companies and then (mostly) hold on to them. Their portfolios are stocked with great companies -- and not-so-great ones.
The mutual fund approach can be a bit savvier, allowing for tactical asset shifts into the best companies. But these funds are typically pricier, and in any event, they tend to spread their assets around among so many companies that it's hard to profit from the success of any particular investment.
Case in point: the Baron Emerging Markets Fund (Nasdaq: BEXFX), which I profiled back in April. Morningstar gives it five stars, and its first glance, it's impressive to note that its top three holdings (South Africa's Steinhoff International and Brazil's Smiles SA and Kroton Educacional) are all up more than 30% this year. Less impressive: Each company accounts for just 2% to 3% of the portfolio. As a result, the broader portfolio is up less than 10% this year.
Yet a look at such a portfolio yields a clever investment strategy. You can analyze the portfolio of leading global mutual funds and ETFs, assess which holdings trade here in the U.S., and cherry-pick the best and the brightest.
Sure, it takes a fair bit of time. But once you find a great global growth stock, it can stay in your portfolio for many years. (And indeed, any international stock carries too many risk factors to be seen as a short-term trade and should always be a long-term holding.) Here are three that stand out to me.
|1. Bona Film Group (Nasdaq: BONA)
Average daily trading volume: 130,000 shares
China has emerged as the largest film market in the world in terms of cinema attendance (and will soon be in terms of box office revenue). On any given day, 14 new screens are opened up around the country, which has pushed the total number of screens in the country past 20,000.
The Chinese government keeps a close regulatory hand on this industry, controlling distribution while ensuring that the content of movies is suitable for government censors. The government is also providing ample incentives to boost domestically produced movies, which should aid the growth of Bona Film.
The company produces and distributes movies across the country. Bona operates just 24 movie theaters now, but management plans to boost that figure to 40 by the end of the year, and perhaps double that base within a few years. The focus on movie production, distribution and screening creates a highly synergistic platform.
The rapid cinema industry growth is showing up right on the company's income statement: Bona Film's revenue has grown from around $50 million in 2010 to around $150 million last year, and analysts see that figure rising to $250 million by next year. To be sure, Bona Film is much smaller than industry giant China Film, but Bona's careful attention to costs should help it sustain earnings before interest, taxes, depreciation, and amortization (EBITDA) margins above 30%, even as it looks to emerge as a strong second player in the industry.
|2. Criteo (Nasdaq: CRTO)
Average daily trading volume: 500,000 shares
Thanks to a robust venture capital industry, the U.S. is already home to dozens of cutting-edge digital advertising firms. These firms have already gained solid traction helping American companies tailor their online branding and marketing campaigns, and now they're expanding into foreign markets as well. As they do, they'll increasingly bump into Criteo, which has already established an early-mover advantage in Europe and emerging markets. Europe, Africa and the Middle East account for around 55% of sales, while Asia accounts for another 20% of sales.
Opening offices in 40 countries around the world has fueled robust growth for Criteo: Sales hadn't even reached the $100 million mark in 2010, yet are expected to surpass $700 million this year (Yahoo estimates appear incorrect). Still, the dot-com meltdown of this past spring has dented Criteo's momentum and shares now fail to reflect the sustained 30% sales growth that Criteo seems destined for over the next few years.
|3. MiX Telematics (Nasdaq: MIXT)
Average daily trading volume: 40,000 shares
This provider of fleet management services surpassed the $100 million mark in revenue for the first time in fiscal (March) 2013, which led management to seek a listing as a U.S. ADR (American depositary receipt). Though the company has a solid growth track record, shares have performed poorly since they began trading here, falling from a peak of $18 last summer to a recent $10.
Yet you have to admire this company's positioning in its industry. While fleet and logistics management is a fairly mature field in the U.S. and Europe, it is still evolving in emerging markets. MiX derives 40% of its revenue from Africa, a similar amount from other emerging markets, and just 20% from Europe and the Americas.
The company's service-as-a-subscription business model is leading to understated growth. Though MiXt is adding to its client base at a 20% annual pace, recognized revenues are expected to grow just 10% this year, as new contracts must be amortized over several years. Analysts at Midtown Partners project sales to start rising at a 15% to 20% pace in 2015 and beyond. And once investors recognize that kind of growth trajectory, Midtown's analysts see shares rising to $16.
Risks to Consider: Emerging markets tend to be more volatile, so the time-tested caveat of longer-term horizons needs to be reiterated.
Action to Take --> These companies have built platforms for long-term growth. And as they trade right here on U.S. exchanges, they can be bought quite easily.