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Morningstar 2009 International Equity Manager of the Decade Nominees — 10 Years Later

(This article originally appeared in Citywire.)

Beating an index is hard enough when you’re focusing on just one market. Imagine the challenges you encounter when you’re attempting to achieve this on an international scale.

Over the past couple of months, I have been casting an analytical eye over the managers that Morningstar nominated in 2009 as its domestic equityand domestic fixed income ‘Managers of the Decade.’

In this round though, I have looked beyond the US to see how well the managers that Morningstar tipped in the international equity category have held out since their nomination.

One thing is immediately clear: International equity managers have performed noticeably better than their domestic counterparts. The international equity nominees have arguably delivered the best performance since 2009 of the three categories that I have analyzed so far, and that’s despite the fact that one fund no longer exists.

The original nominees for Morningstar’s 2009 international equity ‘Manager of the Decade’ award were Jean-Marie Eveillard of First Eagle, David Herro of Oakmark Funds, the team behind the Manning & Napier World Opportunities fund, BlackRock’s Dennis Stattman, and the team running the American Funds EuroPacific Growth fund.

Manning & Napier World Opportunities is the fund that no longer exists, and Eveillard and Stattman have now retired.

Fresh Blood

Let’s start with Eveillard’s pure international charge, the First Eagle Overseas fund. Eveillard and his co-manager Charles de Vaulx stepped down from the fund in late 2008, handing it to Matthew McLennan, who was subsequently joined by Kimball Brooker in early 2010. It appears that the two managers haven’t missed a beat since they took over, with the fund posting a 5.51% annualized return from 2010 through to October 2018, compared with the MSCI EAFE index’s annualized return of 4.49% (see Figure 1).

They aren’t the only ones to have outpaced that index. David Herro’s Oakmark International fund delivered a 6.51% annualized return from 2010 through October 2018.

However, Herro’s performance has taken a big hit this year, recording a 16% decline through October 31 versus a decline of nearly 9% for the index (see Figure 2). The fund has also picked up a standard deviation of nearly 19%, versus just 16% for the index over the past decade.

I will caveat this by saying that Herro’s fund has always been characterized by more volatility than its peers, and investors who have been able to stand the heat over his 25-year tenure have generally been well rewarded.

Next we have the American Funds EuroPacific Growth fund, which has also outpaced the MSCI EAFE index, albeit by a smaller margin over the past decade. The fund has delivered a 4.83% annualized return from 2010 through October 2018, which weighs in as a 0.34 percentage point improvement on the index’s performance.

Of the fund’s current line-up of nine managers, four have been on it since 2002 – almost the entire decade prior to the nomination and the entire period since. Of the other five, four have been on the fund for a decade or more, with the most recent recruit joining in 2014.

Fallen glory

The one pure international equity fund that has failed to outperform since its 2009 nomination is the Manning & Napier World Opportunities strategy, which ceased to exist in late September 2018 after it was merged into another fund.

According to data from Manning & Napier, the fund delivered a 3.69% annualized return from 2010 through to September 21, 2018. By contrast, the MSCI EAFE index delivered a 5.53% annualized return over that period (see Figure 3).

For the remaining fund, the BlackRock Global Allocation strategy, I compared its performance with an index made up of 60% MSCI All Country World index (ACWI) and 40% Bloomberg Barclays US Aggregate Bond index. Stattman’s international multi-asset fund failed to beat that benchmark, posting a 4.27% annualized return versus the blended index’s 5.89%. However, the fund’s virtue is its lower volatility, as it has delivered a standard deviation of 9.22% over the past decade, while the Morningstar Global Allocation category average sits at more than 11%.

Backing the winners

All in all, three of the four pure international equity funds shortlisted by Morningstar beat the index, one pure stock fund was merged out of existence, and the Global Allocation fund failed to beat its blended index but posted impressively low volatility.

The evidence certainly points to international equity being the space where Morningstar enjoyed its greatest success in identifying funds that could continue to outperform.

Also, when there were manager changes or retirements, the successors continued to steer the funds well, possibly indicating that Morningstar did a decent job identifying factors that might be harder to quantify, such as a fund company’s stewardship skills.

The Tale Of The Two Bond Kings

(This article originally appeared in Citywire.)

Back in September, I examined the records of the managers that Morningstar nominated as candidates for ‘domestic equity Manager of the Decade’ in 2009. The results were not hugely encouraging. After making that illustrious shortlist, not one manager went on to beat their best-fit index. The Yacktman fund came closest, gliding so smoothly to its 11.43% annualized return from 2010 through August 2018 that it nearly produced the same Sharpe ratio as the S&P 500 index (1.14 versus 1.15 over the past decade). However, it still trailed the index’s return by more than 2.5 percentage points annualized.

Now, though, it’s time to focus on the nominees for the fixed income ‘Manager of the Decade’ award. The results are decidedly better. In 2009, Morningstar shortlisted Dan FussJeffrey GundlachBill Gross, Christine Thompson of Fidelity’s municipal bond funds, and the team on the Dodge & Cox Income fund. The award ultimately went to Gross, but it turns out that he is the only one to have subsequently posted a poor set of results.

It is unclear why Morningstar’s fixed income nominees have fared better than its equity picks. Perhaps, given the relative illiquidity of the bond market, it’s simply easier for fixed income managers to beat their indices than it is for their equity counterparts. Or maybe manager selectors and consultants have an easier job when it comes to identifying talented bond managers. Whatever the explanation, the fund analysts at Morningstar (including me, at the time) certainly seem to have been more successful in having their bond ‘Manager of the Decade’ nominees go on to post good returns in the future.

Masters of their domains

First up is Christine Thompson, who headed Fidelity’s municipal bond operation at the time of the nominations. She is no longer listed as a manager of Fidelity’s funds, but it was obvious that Fidelity’s municipal bond operation had depth and that this was a team nomination. For the period from 2010 through the end of September 2018, the Fidelity Municipal Income fund has posted a 43.7% cumulative return, while the Bloomberg Barclays Municipal Bond index has delivered 39.9% (see Figure 1). Over the past decade, the fund’s 1.09 Sharpe ratio has trailed that of the index (1.13), meaning that it has incurred more volatility to achieve its outperformance. Even so, it would be difficult to say that the fund has carried an unjustifiably high level of volatility.

Next, we have the ‘bond kings,’ Bill Gross and Jeffrey Gundlach, and the Dodge & Cox Income fund. All three deserve to be judged against the Bloomberg Barclays US Aggregate Bond index. There are two caveats with our data here. Gundlach left the TCW Total Return fund in December 2009 and began managing the DoubleLine Total Return fund the following April. Here, I have taken the TCW fund’s 2010 data through April and then hooked it up to DoubleLine’s data starting on May 1 that year. Similarly, for Bill Gross, I took the Pimco Total Return fund’s data from 2010 through October 2014 and then picked up with Gross’s new charge, the Janus Global Unconstrained fund, in November 2014. Gross began his tenure at Janus on October 6, 2014.

No Undue Risk

Realistically, Gundlach has dominated the period since the ‘Manager of the Decade’ nominations. According to the spliced data, he posted a 58.9% cumulative return from 2010 through the end of September 2018. His combination of safe Ginnie Mae bonds and beaten-up, high-yielding Alt-A private label mortgage-backed bonds has worked splendidly.

The team of managers that runs the Dodge & Cox Income fund has acquitted itself well too, delivering a cumulative return of 39.6% versus the index’s 30.7%. Gross, by contrast, has returned just 29.4% over that period (see Figure 2).

And lest anyone suppose that it was reckless portfolio positioning that accidentally produced Gundlach’s heady post-crisis returns, let the record show that he hunkered down with higher quality securities exactly when he should have done in 2008. That year, he piloted the TCW Total Return fund to a top-decile performance in the Morningstar intermediate-term bond fund category, with a 1.09% return.

Finally, the Loomis Sayles Bond fund, led by Dan Fuss, has outpaced the index with a cumulative return of 65.1% versus the Agg’s 30.7% (see Figure 3). However, investors should take this with a pinch of salt. The fund routinely invests in junk bonds and emerging market debt, along with a slug in safer sovereign debt. That makes it more volatile. Indeed, its Sharpe ratio over the past decade through September 2018 is 0.84. Compared with the Agg’s 1.04 Sharpe ratio over the same period, the Loomis Sayles Bond fund arguably hasn’t achieved as attractive a volatility-adjusted return.

Overall, the Morningstar ‘Manager of the Decade’ nominees in fixed income have produced solid results since 2009. Consultants often think small-cap stocks and international markets afford greater opportunities for active management to shine. Perhaps the ability fixed income provides has been under-appreciated.