Tag Archives: Oakmark International

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.

Foreign Stocks And Funds Worth Considering

Foreign stock markets have underperformed U.S. stocks this year (if you exclude U.S. small caps). The MSCI ACWI ex-USA Index is down nearly 14% through December 18. But for the month of December, the trend has been changing, with U.S. indices dropping more than foreign indices. And that means it may be time to look at some foreign stocks.

First on the list are German automakers. They are under a lot of pressure from tariffs, slowing sales, which have arguably been boosted by easy credit over the past few years, and perhaps even competition from Tesla, which has brand cachet. Still, Daimler (DMLRY), BMW (BMWYY), Volkswagen (VWAGY), and Porsche (POAHY) look cheap. They all trade at single-digit P/E ratios and P/S ratios of 0.5 or less.

If you’re looking for additional confirmation, the Oakmark International fund (OAKIX) ,run by Morningstar’s International Equity Manager of the Decade in 2009 David Herro, has nearly than 8% of its assets in Daimler and BMW according to its September 30 portfolio. This fund has struggled mightily this year with a nearly 23% loss through December 18, but it has outpaced the MSCI ACWI ex-USA Index for the past 10- and 15-year periods with Herro at the helm for the entire time.

Another stock to consider is Rolls Royce (RYCEY). I don’t mean the auto maker here, which is actually a division of BMW these days, but the jet engine maker. Along with General Electric, Rolls is part of a duopoly in the wide-body commercial engine space. Nobody else makes engines for the largest commercial planes. Pratt and Whitney, for example, makes engines for medium-sized commercial planes. Rolls has had production trouble, and investors have been clamoring for the firm to spinoff or sell other divisions. The American Depository Receipts traded at around $20 per share a decade ago, and are now at around $10 per share. The stock trades at under 1x Price/Sales.

Investors should also check out French pharmaceutical company Sanofi (SAN). It’s the top holding of the Dodge & Cox International Stock fund. The firm markets drugs with an emphasis on oncology, immunology, and cardiovascular disease. It also happens to be one of Berkshire Hathaway’s (BRK.A) publicly traded holdings.

For emerging markets exposure, consider the iShares Emerging Markets Dividend ETF (DVYE). This fund doesn’t look like the typical emerging markets fund because its dividend emphasis leads it to hold stocks from different countries than other funds. For example, the MSCI Emerging Markets Index has 30% exposure to China and another 33% exposure to South Korea, Taiwan, and India. But the dividend ETF has nearly 30% exposure to Taiwan. China clocks in as the fourth highest represented country with its market soaking up less than 10% of the portfolio. One risk of this dividend ETF is that 16% of its assets are in Russia, which makes its shareholders likely partners with Vladimir Putin in those holdings. Nobody ever said emerging markets investing was easy, but at least investors in this fund are getting a 5.65% dividend yield and an average P/E ratio of less than 10 for their trouble.

(John Coumarianos has positions in DMLRY, BMWYY, VWAGY, RYCEY, OAKIX, and DVYE.)