International-Stock Funds Recoil in 2020
International equity markets cratered as the world grappled with the adverse health and economic impacts of the novel coronavirus.
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The rapid spread of the novel coronavirus spurred a dramatic market sell-off in 2020’s first quarter. Indeed, the drop was the sharpest from a market crest in recent history, beating out the 1987 downturn that included Black Monday for the dubious honor. Though markets staged a late rally, the MSCI All Country World Index ex USA tumbled 23.4% for the quarter. Developed-markets equities held up slightly better than their emerging counterparts, as the MSCI EAFE Index’s 22.8% drop was less than the MSCI Emerging Markets Index’s 23.6%.
Despite the shift in market direction, several trends continued in the new year. International equities lagged their U.S. siblings yet again. The Russell 3000 Index, a broad measure of U.S. equities that has outpaced the MSCI ACWI ex-USA by a wide margin for 10-plus years, lost 20.9% in the first quarter, less than all three international benchmarks. Similarly, growth equities lost less than their value cousins in the first quarter, and the MSCI ACWI ex USA Growth has now bested its value counterpart in 70% of the past 40 quarters. The disparity in the quarter that ended on March 31, however, was stark. The former’s harrowing 18.3% loss was still more than 10 percentage points less than the MSCI ACWI ex USA Value’s 28.6% loss--the largest quarterly differential between the benchmarks in the MSCI ACWI ex USA’s 19-plus year history.
It’s no surprise, then, how non-U.S. Morningstar Categories stacked up. Foreign large-growth’s 19.1% loss and small/mid-growth’s 24.5% tumble were, respectively, 7.8 and 5.5 percentage points shallower than their respective value peers. The foreign large- and small/mid-blend categories landed in the middle. There were some notable outliers in more specialized categories. On one end, the average China region category fund lost 10.4%, much less than most diversified peers. Chinese equities have held up better than expected even as the country was the epicenter of the virus. Meanwhile, crashing oil prices sunk Latin American equities susceptible to the commodity’s volatility, sending the category 45.9% lower.
Several strategies provided some ballast in 2020’s first quarter, but virtually none avoided steep absolute losses. Here are a few funds that held up well, and some that struggled.
Value Stalwarts Struggle
A prominent group of Oakmark strategies foundered. Oakmark International’s (OAKIX) 38.1% nosedive was nearly 15 percentage points worse than its MSCI World ex USA benchmark and placed in the bottom percentile of foreign large-blend peers. Holdings like French bank BNP Paribas (BNP), mining giant Glencore (GLEN), and auto and auto parts stocks Daimler (DAI) and Continental (CON) each shed more than 40%. Such performance swings are characteristic of since-inception manager David Herro’s aggressive, contrarian approach. The fund, which has a Morningstar Analyst Rating of Gold, followed top-decile finishes in 2016 and 2017 with a 99th percentile finish in 2018.
Three other Oakmark strategies that Herro comanages posted similar results for similar reasons. Gold-rated Oakmark Global (OAKGX) and Silver-rated and more concentrated Oakmark Global Select (OAKWX) rued underweighting U.S. equities and their value bent relative to the MSCI World Index and world large-cap stock category didn’t help. Indeed, both funds lost more than 95% of their peers and finished the quarter at least 9 percentage points below the benchmark. European financials and industrials stocks also sank Oakmark International Small Cap (OAKEX). The Bronze-rated fund’s 38.3% loss was almost 10 percentage points deeper than its MSCI benchmark and ranked in the foreign small/mid-blend category’s third-worst percentile.
The flagship global and international strategies of Dodge & Cox, another renowned value-oriented shop, also limped out of the quarter. Stakes in European financials, such as Italy’s Unicredit and France’s BNP Paribas and Societe Generale hampered Dodge & Cox Global Stock (DODWX) and Dodge & Cox International Stock (DODFX), which are both Gold-rated. Oil’s precipitous drop took down U.S.-based Occidental Petroleum (OXY), exacerbating the global strategy’s losses, and Canadian oil sands firm Suncor Energy (SU) dented both funds’ performance. Dodge & Cox Global Stock’s 31% retreat was worse than the MSCI World Index’s 21.1% and 98% of world large-cap stock category peers, and Dodge and Cox International lost 30.5%, nearly 8 percentage points more than the MSCI EAFE Index.
Enterprising Strategies That Played Defense
Morgan Stanley Institutional Global Opportunities (MGGIX), one of the bolder growth strategies in the world large-cap stock category, held up exceptionally well. Its 11.7% loss placed in the top 3% of the category and beat the MSCI ACWI by 9.6 percentage points. Manager Kristian Heugh has long been a believer of the growth opportunities in Chinese equities, and top holdings TAL Education (TAL) and soy sauce manufacturer Foshan Haitian Flavouring and Food were among a handful of equities that rose in the first quarter. Eschewing the plummeting energy and materials sectors bolstered the Bronze-rated fund’s returns, too.
London-based William Lock, Heugh’s Morgan Stanley colleague, deftly led Morgan Stanley Institutional Global Franchise (MSFAX) through the storm, though that’s been a defining attribute of his approach. Lock seeks firms with durable business models and rock-solid balance sheets, building a portfolio that favors the consumer staples, tech, and healthcare sectors--the sectors that held up better than the broader market in the downturn. The Bronze-rated fund’s 13.1% loss for the year to date was roughly three fifths that of the MSCI ACWI’s.
After 2019’s 42.0% gain more than doubled its MSCI Emerging Markets benchmark, Artisan Developing World (APHYX) remained top of its class in the first quarter. Though the strategy wasn’t immune to the market tumult, its 8.1% loss was just one third the index’s and led the diversified emerging markets category. To be sure, this Bronze-rated strategy isn’t a pure play on emerging markets, with names like NVIDIA (NVDA) and Visa (V) sprinkled throughout the portfolio. Yet its holdings in both developed and developing economies weathered the turmoil better than most peers.
Tom Nations does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.