There has been a lot of focus on the US “Magnificent 7” (M7) stocks and how they have accounted for the lion’s share of returns in the S&P 500 Index over the last two years. Investors might be surprised to know that, as important as those American stocks are, there is a similar grouping in international markets that have produced nearly the same return over the past two years.
The Magnificent 7 (“M7”), refers to the following stocks, Microsoft Corp (MSFT), Amazon (AMZN), Meta Platforms (META), Apple (AAPL), Alphabet (GOOGL), Nvidia Corp. (NVDA) and Tesla Inc (TSLA).
Since internationally listed stocks (those in developed markets outside of North America) are not as widely followed as large-cap North American stocks, investors may not be as familiar with the “GRANOLAS” (GlaxoSmithKline, Roche, ASML, Nestle, Novartis, Novo Nordisk, L’Oreal, LVMH, AstraZeneca, SAP, and Sanofi) — eleven of the largest companies in Europe, based on market capitalization, who have had similar growth trajectory to the M7 stocks. It may be surprising to some, but GRANOLAS have posted similar CAD-adjusted returns to that of the M7 since the beginning of 2022 (29.2% vs 32.5%)1, while also experiencing far less volatility than the M7, with a standard deviation of 13.4 vs 21.5 over the same period2.
The main driver for the GRANOLAS experiencing less volatility than the M7 is the quality factor, where these stocks tend to have a higher amount of cash on their balance sheet and lower valuations. On average, they also have a higher dividend yield, which is funded by that free cash flow.
The M7 stocks have a technology focus, with valuations based on forward earnings expectations, which can shift dramatically over a short period, while the GRANOLAS stocks are dividend-paying, mature businesses with tangible and stable cash flows that have historically been less volatile3. This trend is illustrated in the graph above, with GRANOLAS outperforming the M7 by nearly 45% during the market drawdown in 20224.
Further enhancing the value proposition of the GRANOLAS stocks is their current valuations. Despite the GRANOLAS delivering strong performance over the past three years and keeping pace with the M7, their current valuations remain significantly lower. Currently, GRANOLAS stocks have an aggregate P/E ratio of 33.2x, which is considerably less than the M7’s aggregate P/E ratio of 44.1x5. Additionally, the GRANOLAS stocks have a relatively low correlation compared to the M7 since the start of 2022.
What’s even more interesting is when you benchmark the GRANOLAS vs. the broader MSCI EAFE Index, which is a standard benchmark for international stocks and is comprised of more than 780 stocks. Stocks in economically sensitive sectors in this index have struggled due to the slower economic growth of the EAFE economies6 versus the U.S. The GRANOLAS highlight that, while there are stocks in the EAFE index that have struggled relative to U.S. stocks, there are still some exceptional stocks in this universe, but that the universe as a whole is possibly not that attractive.
Despite the MSCI EAFE Index trailing the S&P 500 Index, we believe investors may be able to reap rewards by selective investments in high-quality EAFE stocks.
Guardian International Equity Select Fund
The primary objective of the Fund is the achievement of a high level of stable income, with an attractive total return, by investing primarily in international dividend-paying equity securities.
The Fund’s Manager seeks to invest in high-quality companies (more than half of the GRANOLAS are included in the Fund’s portfolio)—it is focused on finding the most attractive investments, from both a valuation and growth lens, within the EAFE universe.
There are world-class stocks in the EAFE universe; however, the Guardian International Equity Select Fund seeks to build a more concentrated stock portfolio of global leaders that just happen to be domiciled in the EAFE markets.
The Fund maintains an international equity focus and invests primarily in securities of mid-to-large-size international companies that have a track record of paying and growing dividends. International markets are defined as those countries included in the MSCI EAFE Index — 21 developed markets, including countries in Europe, Australasia and the Far East (EAFE)and excluding the US and Canada. Securities are selected primarily from developed markets, but the Fund may invest in emerging market securities. The Fund is broadly diversified by sector and seeks a dividend yield that is competitive with the market, it normally holds between 15 and 30 issuers.
Three reasons to consider the Guardian International Equity Select Fund
- Core building block International equities have historically provided attractive opportunities from a valuation, diversification and yield standpoint relative to North American equities.
- Growth-at-a-discount approach Employs an approach focusing on companies with above-average projected growth rates trading at valuation discounts relative to the broad international equity market.
- High-conviction, low-turnover portfolio Typically invests in 20-25 high quality mid-to-large cap companies, diversified by industry and geography, with strong historical records of profit and dividend growth.
Access the Solution
Guardian International Equity Select Fund is a concentrated portfolio that exposes investors to quality international companies diversified across economies and industries.
To learn more about Guardian Capital LP’s international equity solution, please visit guardiancapital.com/investmentsolutions
1 Source: Guardian Capital LP based on data from Bloomberg as of 04/30/2024.
2 Source: Guardian Capital LP based on data from Bloomberg as of 04/30/2024. A lower standard deviation reflects lower volatility and is a standard measure of investment risk.
3 While the Magnificent Seven are all concentrated in the Information Technology sector, the GRANOLAS are more diversified and encompass the Health Care, Consumer Discretionary, Consumer Defensive and Information Technology sectors.
4 Source: Guardian Capital LP based on data from Bloomberg as of 04/30/2024.
5 Source: Guardian Capital LP based on data from Bloomberg as of 04/30/2024.
6 The MSCI EAFE Index includes large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East (EAFE), but excludes the U.S. and Canada.
Definitions:
Dividend Yield: Ratio of a dividend issued by a company relative to their share price.
P/E: Ratio of the price of a stock and the company’s earnings per share.
P/B: Ratio of the stock price to the book value per share. Calculated as Price to Book Ratio = Last Price / Book Value Per Share.
*Index Weight: Weight held in the respective indexes of the Granolas and M7 (MSCE EAFE Index and S&P 500 Index).
Correlation: Measures the relationship between two variables for the historical period you selected. A correlation’s measure is always between -1 and 1. A positive correlation indicates that the two securities move in tandem with each other. A negative correlation indicates that the two securities move inversely of each other.
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This communication is for informational purposes only and does not constitute investment, financial, legal, accounting, tax advice or a recommendation to buy, sell or hold a security, and shall under no circ*mstances be considered an offer or solicitation to deal in any product or service mentioned herein. It is only intended for the audience to whom it has been distributed and may not be reproduced or redistributed without the consent of Guardian Capital LP. This information is not intended for distribution into any jurisdiction where such distribution, publication, availability or use is restricted by law or regulation.
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Please read the prospectus, Fund Facts or ETF Facts before investing. Important information, including a summary of the risks, about each Fund is contained in its respective offering documents. Commissions, trailing commissions, management fees and expenses all may be associated with investments in mutual funds and ETFs. You will usually pay brokerage fees to your dealer if you purchase or sell units of an ETF on a stock exchange. If the units are purchased or sold on the stock exchange, investors may pay more than the current net asset value when buying units of the ETF and may receive less than the current net asset value when selling them. Mutual funds and ETFs are not guaranteed, their values change frequently and past performance may not be repeated.
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Published: June 6, 2024
