Three former winners vie to add to their trophy case.
In last Thursday's Fund Spy, we unveiled the nominees for Morningstar's Domestic-Stock Fund Manager of the Year. Here are the nominees for International-Stock Fund Manager of the Year. Columns discussing the nominees for other asset classes will follow this week and next, and the winners will be announced on Jan. 25.
These nominations reflect more than the managers' performance and portfolio decisions in 2016 alone; we're not trying to promote one-year wonders. Rather, we recognize managers who not only had strong results in 2016, but whose impressive one-year showing underscores the merits of their approach and their ability to deliver sound long-term performance. To be nominated, therefore, managers must have demonstrated success over time as well as in 2016 and must run a fund with a Morningstar Analyst Rating of Gold, Silver, or Bronze.
The 2016 investment environment once again was a challenging one for international-stock managers. Although most European economies eked out modest rates of growth, political developments--including Britain's vote to leave the European Union and the U.S. presidential election--as well as continuing problems with some of that region's banks raised all kinds of uncertainty along with tangible effects. In the case of the euro and, more drastically, the British pound, one effect was a decline in currency values. That said, stocks in the United Kingdom rebounded after a sharp fall immediately after that country's referendum (the pound did not recover), and many emerging-markets stocks and currencies that had sputtered in 2015, notably those in Brazil and Russia, posted strong gains on both fronts.
Overall, the foreign-stock categories posted weaker gains than their counterparts that target the United States, owing partly to currency effects. Some managers, though, stood out. Below are the three nominees for the 2016 Morningstar International-Stock Fund Manager of the Year award, listed with their most prominent fund.
David Samra and Daniel O'Keefe
Artisan International Value ARTKX
2016 Return: 5.5%
Morningstar Category Rank (Percentile): 8
10-Year Return (through Dec. 31, 2016, annualized): 5.4%; MSCI ACWI ex USA Index: 1.0%
David Samra and Daniel O'Keefe run a compact portfolio (closed to new investors) of 40-50 stocks, using a value-leaning strategy that relies on more of an all-cap approach than their typical peer. The duo has won the award for Morningstar International-Stock Fund Manager of the Year twice, in 2008 and 2013. While two manager-of-the-year awards would be notable under any circumstances, it's exceptional that these managers racked up their awards in two very different climates. In 2008--as many readers no doubt remember, despite efforts to repress the memory--global markets were in free-fall in response to an alarming financial crisis. The managers held this fund's losses far below those of competitors and benchmarks. Five years later, in 2013, they were able to outperform markedly in an exuberant rally, proving that they weren't just defense mavens.
It's perhaps fitting, therefore, that Samra and O'Keefe have earned another nomination in a year that falls between those two extremes. In 2016, most foreign stock markets posted gains, but the foreign large-blend Morningstar Category--where Artisan International Value and the main funds run by the other nominees are classified--rose only 0.8%. This fund succeeded partly because of purchases made in previous years. For example, they bought Telefonica Brasil in July 2015 when Brazil was in the midst of political and economic turmoil and the stock price had fallen sharply. The managers bought more of it when most investors continued to flee in late 2015 and early 2016 and reaped the benefit when the stock then soared.
The managers' long-term returns are exceptional as well; this fund's annualized 10-year return of 5.4% through year-end 2016 crushed the MSCI ACWI ex USA Index's figure of 1.0%.
Dodge & Cox International Investment Policy Committee
Dodge & Cox International Stock DODFX
2016 Return: 8.3%
Morningstar Category Rank (Percentile): 2
10-Year Return (annualized): 2.1%; MSCI ACWI ex USA Index: 1.0%
Like Samra and O'Keefe, this manager team has twice been named as International-Stock Fund Manager of the Year. In this case, the awards came in 2004 and 2014. While the composition of the group has changed somewhat since the fund's 2001 inception, nearly all of the eight current members (plus another one who retired in mid-2016) have been on the team either as managers or analysts since inception. And the fund's patient, long-term, value-leaning strategy has remained in place throughout.
This fund--which is closed to new investors--posted a strong gain in 2016 mainly by holding on to, and in many cases adding to, long-term holdings that had been severely punished in the previous year. It landed near the top of the foreign large-blend category and also outpaced the bulk of funds in the foreign large-value group (its portfolio has drifted back into large-value territory).
A prime example was Petrobras, the scandal-ridden oil giant that seemingly nobody wanted to own in 2015 when it was beset by investigations and plummeting oil prices along with Brazil's political storm. This team not only stuck with it but added to its stake throughout the year. That stock more than doubled in 2016. The team also succeeded by sticking with other Brazil stocks and to both sides of the split-up Hewlett-Packard. In addition, an aversion to rallying consumer staples stocks, because the managers considered them overpriced, paid off when such stocks stumbled as interest rates rose in 2016.
This fund's willingness to go where most others don't dare can make for a bumpy ride. The fund lost more than most rivals in the global financial crisis of late 2007 to early 2009, and in 2015, rocked partly by the fall in Brazil's stocks and currency as well as its lack of consumer goods stocks, the fund lost 10 points more than the foreign large-blend category average.
Oakmark International OAKIX
2016 Return: 7.9%
Morningstar Category Rank (Percentile): 3
10-Year Return (annualized): 4.2%; MSCI ACWI ex USA Index: 1.0%
David Herro, who ran this recently reopened fund with Rob Taylor until Taylor's retirement in the fall, previously won International-Stock Fund Manager of the Year in 2006 and was also named International-Stock Manager of the Decade for the 2000-2009 period. Like this year's other nominees, Herro goes his own way, often assembling portfolios quite different than indexes and most peers, and he has below-average turnover rates, though not as low as those of the other nominees.
The most powerful engine behind Oakmark International's 2016 gain was mining stalwart Glencore. In the previous year, Glencore was an embattled company making the wrong kind of headlines, faced with plunging commodity prices and a heavy debt load. But unlike most investors, Herro decided to jump in. He bought it in the second quarter of 2015 and reinforced his commitment by adding many more shares in the second half of the year as doubts about the firm's future sent its share price down further. He and Oakmark International's shareholders were rewarded handsomely for that bold move when Glencore's price climbed more than 200% from its lows.
The fund also benefited from two other 2015 purchases: the U.K.'s Ashtead Group, a firm that rents out industrial equipment, and Indonesia's Bank Mandiri, both of which rose more than 25% in 2016.
Herro's style is not necessarily easy to own. Stocks that fall out of favor may remain that way for quite some time, or fail to rebound at all, leading to some rough periods for fund returns. Indeed, going into the second half of 2016, this fund's record for the past couple of years wasn't pretty. But the long-term record shows that its strong recovery and resulting topnotch 2016 return was no fluke. The fund lands in the top decile of the foreign large-blend category for the trailing five- , 10- , and 15-year periods through the end of 2016, and it has beaten the index soundly over all of those stretches.
Morningstar senior analyst Greg Carlson contributed to this column.