How Some Top-Rated International Funds Are Doing
Our analysts examine the recent performance of funds from Oakmark, Dodge & Cox, and T. Rowe Price, among others.
|Editor’s note: Read the latest on how the coronavirus is rattling the markets and what investors can do to navigate it.|
The coronavirus is a global pandemic--and its impact has been felt by stock investors around the world. The foreign large-blend Morningstar Category is down about 28% for the year as of this writing.
Our analysts have been taking a look at the performance of some of the funds earning our highest Morningstar Analyst Ratings. The goal: to determine whether a given fund’s performance is out of step with its strategy. What they’re finding so far: Although in most cases the returns on these highly rated funds are painful, they aren’t unexpected given the funds’ approaches.
Here’s what we think today of some of the more popular, highly rated international funds our analysts cover.
T. Rowe Price Overseas (TROIX)
“This fund has underperformed thus far during this year’s global-equity meltdown. From the Jan. 17 peak for international stocks through March 20, the no-load share class of this fund lost 34.4% versus 32.9% for its typical rival in the foreign large-blend Morningstar Category and 31.8% for the MSCI ACWI Index.
"That really hurts, and several individual picks have caused considerable pain, including the French Insurer AXA and a number of its other financial-services holdings. But this fund has also been at a strategic disadvantage during the meltdown. Value stocks have suffered especially steep falls, while growth equities have incurred less precipitous declines. (The MSCI ACWI ex USA Value and MSCI ACWI ex USA Growth indexes dropped 36.1% and 27.7% during the period, respectively.) Manager Ray Mills normally invests more in value stocks and less in growth equities than the average foreign large-blend manager and the MSCI ACWI ex USA Index. (This fund frequently straddles the border between the large-value and large-blend sections of the Morningstar Style Box.)
"Meanwhile, Mills remains a seasoned skipper with strong credentials, including a solid 7.5-year record running a foreign large-value fund earlier in the 2000s. His investment process remains sound. And he has delivered relatively good returns over the longer term with his process. For the 10 years through March 20, the no-load share of this fund earned a 1.85% annualized return versus 1.07% for the typical foreign large-blend offering, and 1.14% for the MSCI ACWI Index, and its risk metrics are in line with those of its average peer and the index during the decade ended Feb. 29.
This fund’s two cheapest share classes still merit Morningstar Analyst Ratings of Silver, while the priciest share class still deserves a Morningstar Analyst Rating of Bronze.”
William Samuel Rocco, senior analyst
Dodge & Cox International Stock (DODFX)
“Dodge & Cox International Stock has had a rough 2020. Its painful 38.4% decline for the year through March 18 landed in the bottom quartile of its foreign large-blend Morningstar Category. Even so, its seasoned investment committee and time-tested approach should help it make adjustments and navigate these challenges over the long run. Its Morningstar Analyst Rating remains at Gold.
"As with other Dodge & Cox strategies, the managers' contrarian streak led this fund into sectors that had languished even before the novel coronavirus hit, such as financials and energy. Key holdings in each area were among its worst performers for the year to date. It counted four European banks among its top 10 holdings in December 2019: Italy's UniCredit, France's BNP Paribas, and Swiss firms UBS and Credit Suisse. Each of their stocks had dropped 30% or more through mid-March. Collapsing oil prices hurt Suncor Energy (SU), and Morningstar's equity analyst covering Suncor says its Canadian oil sands operations likely felt the most pain. Longtime holding Schlumberger (SLB) dropped sharply as the oil glut threatened to undermine capital expenditures in the oil patch.
"The Dodge & Cox brand of value investing sometimes courts risk, but the coronavirus and the steep drop in oil prices were an unexpected double whammy that pummeled this fund. Nonetheless, the managers have been consistent with an approach that has tended to reward patient investors, so there's reason to stay the course.”
Tony Thomas, senior analyst
Causeway Global Value (CGVVX)
“Causeway Global Value has struggled thus far in the downturn that began in global markets on Jan. 20, 2020. From then through March 16, it fell a painful 41.3%, compared with 32.3% for the MSCI ACWI Value Index. The managers employ an aggressive approach, often leaning into volatility by embracing firms going through short-term crises when their valuations look attractive. This preference for out-of-favor firms shifted the portfolio a bit toward economically sensitive stocks leading into the downturn, which hurt when markets tumbled. Travel technology firm Sabre (SABR), a top-10 holding as of December 2019, took a hit from the coronavirus outbreak; it lost nearly three fourths its market value during the period and was among the leading detractors. Stock selection has been poor across sectors, but industrials, technology, and energy holdings most notably weighed on results. The strategy's approach has often been a liability in down markets, but it has shown it can make up ground in other markets.
"This strategy's strengths remain intact, including its veteran management team of Sarah Ketterer and Harry Hartford, so its Morningstar Analyst Rating remains Gold for both its share classes. Investors here may need to be patient, however.”
Connor Young, analyst
Oakmark International (OAKIX)
“Oakmark International has borne the brunt of the 2020 global market rout, but its manager remains undaunted and its Morningstar Analyst Rating unchanged.
"The fund, with a Morningstar Analyst Rating of Gold, lost 42% for the year to date through March 16, falling nearly 40% in the last month alone. The fund ranked among the worst foreign large-blend Morningstar Category funds for the year. European banks Credit Suisse Group and BNP Paribas, mining giant Glencore, and auto and auto parts stocks Daimler and Continental were among the portfolio’s most painful holdings, each falling 44% or more in the month ended March 16.
"In public comments since the start of the tumult, however, manager David Herro has reiterated his thesis for owning these and other beleaguered companies, and his conviction that extreme market volatility creates opportunities for value investors as share prices disconnect from businesses’ intrinsic values. Interest rates, and thus banks’ spread income, are infinitesimal, yet financial institutions still have been able to maintain and grow earnings with noninterest income, better loan underwriting, and cost cuts, Herro said. European banks offer low valuations on normalized earnings and high yields. The gap between Glencore and the auto industry stocks’ prices and intrinsic values also have widened as investors have fled to investments that look safer.
"Herro’s willingness to stand fast and even buy more when others recoil has been a cornerstone of his approach for nearly 28 years. He bought luxury goods companies in the 2008 global financial crisis, Japanese stocks after 2011's catastrophic earthquake and tsunami, Glencore during a commodity 2015 landslide, U.K. stocks after the 2016 Brexit vote, and European automakers and financials amid global trade war fears in 2018 and 2019. Each time, Herro’s bottom-up stock-picking in cast-off areas bore fruit in subsequent months and years and his long-term record remains superior. It is a risky approach that requires fortitude, but it is consistent.”
Dan Culloton, director
Dan Culloton, Tony Thomas, William Samuel Rocco, and Connor Young own Dodge & Cox International Stock; Connor Young owns Oakmark International.
Susan Dziubinski has a position in the following securities mentioned above: DODFX. Find out about Morningstar’s editorial policies.
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