A World Full of Opportunities

Recent returns have been a powerful driver of flows into U.S. equities, and the temptation may be to stay stateside. But global markets are fluid and present a world of opportunities for return enhancement and diversification. In times like these, long-term investors should consider the potential benefits of maintaining an allocation to international equities.

U.S. and Non-U.S. Performance Leadership Changes Over Time

Reviewing annual returns since 2000 or five-year rolling returns since the 1970s highlights the fact that cycles of U.S. and international leadership tend to be long and varied. Prior to the most recent U.S. dominance, there was a long period of international outperformance in the 2000s and several years in the 1980s and 1970s. With the relative underperformance of international equities again approaching historical extremes in both duration and magnitude, experience indicates that international stocks are due to reclaim market leadership.

5-Year Rolling Returns²
(S&P 500 Index - MSCI World ex-U.S. Index)

Catalysts for Change

We believe there are many strong market indicators that could lead to international equities outperforming U.S. equities in the near future. Factors that could drive this shift include historically high valuations for U.S. equities, higher projected growth rates for regions outside the U.S., and weakening of the U.S. dollar.

#1 - U.S. Equity Valuations Near Record Highs

Historically, there has been a strong link between starting valuations and subsequent long-term returns. U.S. stocks are approaching historical highs versus international stock valuations. Such extremes were also present at the beginning of international outperformance in the 2000s. Given elevated U.S. valuations relative to their own recent history and the valuation differential between U.S. and international markets today, the case for international investing is appealing.

Valuation Ranges Across Regions³
(12-Month Foward P/E, January 2006 - May 2024)

#2 - Growth Varies Around The World

Projected elevated growth rates in non-U.S. countries provide favorable prospects to capitalize on potential future growth. Despite being underrepresented in the global index, many other countries outside the U.S. contribute to global production and growth. Approximately 96% of the world’s population, 84% of the world’s economic activity, and 65% of public companies with market capitalizations greater than $5 billion are located outside the U.S. Data indicates many countries offer superior growth opportunities relative to the U.S.

Growth Projections by Region⁴
(Real GDP Growth %)

#3 - U.S. Dollar Volatility

The periods from 1994 to 2001 and post the Great Financial Crisis share common factors that contributed to demand for the U.S. dollar, including Federal Reserve Policy, U.S. economic growth, foreign capital inflows into the U.S., relative political stability, and technological innovation. U.S. equities generally outperformed in these periods.

Variables changed in the early 2000s, leading to a weakening U.S. dollar and resulting in outperformance of international equities. The next cycle may see volatility in the U.S. dollar, and diversifying a portion of assets into international equities may be a reasonable strategy.

U.S. Dollar Strength vs. Calendar Year Relative Return⁵
(MSCI ACWI ex-U.S. Index - S&P 500 Index)

A World Full of Opportunities

Investing in only U.S.-based companies significantly limits the opportunity set for investors. In fact, on average over the last 14 years, 75% of the 50 top performing stocks in the MSCI ACWI Index were non-U.S. stocks.

Percent of Top 50 Performing Stocks Based Outside of the U.S.⁶
(in the MSCI All Country World Index)

Chautauqua Capital: Finding Advantaged Companies for the Long Term

We uncover exceptional wealth-generating companies using in-depth fundamental analysis on a company-by-company basis and invest with a long time horizon. At Chautauqua, we seek companies that:

• Benefit from durable, long-term trends
• Possess competitive advantages that enable them to capture the lion’s share of the profits created by those trends
• Can be purchased at reasonable valuations

Rolling Five-Year Returns Since Inception⁷
04/30/2021 to 05/31/2024 (monthly, USD)

The Baird Chautauqua International Growth Equity Fund (CCWIX) provides investors international diversification with faster growth, more profit, and less leverage than the MSCI ACWI ex-U.S. Index. The fund has outperformed the index over rolling five-year periods since inception.

Fund Performance
(as of 05/31/2024)

Performance data represents past performance and does not guarantee future results. The investment return and principal value of the investment will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the data quoted. For performance data as of the most recent month-end, please visit bairdfunds.com. The Net Expense Ratio is the Gross Expense Ratio minus any reimbursement from the Advisor. The Advisor has contractually agreed to waive its fees and/or reimburse expenses at least through April 30, 2025, to the extent necessary to ensure that the total operating expenses do not exceed 1.05% of the Investor Class's average daily net assets and 0.80% of the Institutional Class's average daily net assets. Investor class expense ratios include 0.25% 12b-1 fee.

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International/Global Growth Investment Team

For more information regarding how Chautauqua can help add value to your investment lineup, please contact us:

Jesse Flores, CFA Partner

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Haicheng Li, CFA Managing Partner

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David Lubchenco Partner

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Nathaniel Velarde Partner

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