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Fund Spy

Wild Ride for International Equities in 2020

Investors looked past the pandemic’s near-term impact.

Strong gains for international equities in 2020 masked the tumult that they experienced along the way. The MSCI All Country World Index ex USA gained 10.7%, but it also endured the fastest-developing bear market in its history during the first quarter. Driven by fears of the rapidly spreading coronavirus, the index fell an astounding 34.4% from Jan. 20 through March 23, a span of just 64 days. Investors didn’t discriminate much during the panic, selling more-volatile emerging-markets stocks at about the same rate as those of developed markets. The MSCI Emerging Markets Index plummeted 33.7%, just shy of the MSCI World ex USA Index’s 34.7% fall.

The pain didn’t last long, though. Central banks around the globe responded with massive liquidity injections, which helped calm fears. The Federal Reserve in the United States slashed interest rates, established lending facilities to assist businesses, and even bought corporate bonds. The European Central Bank followed a similar pattern, announcing stimulus measures in March designed to promote bank liquidity and keep borrowing costs in check. Markets rebounded sharply to close out March, followed by gains through the summer months and into the fall. By November, the losses were recouped.

In keeping with the last decade’s bull market, growth stocks drastically outperformed value stocks as investors piled into companies largely insulated from the effects of mandatory lockdowns, particularly those in technology, e-commerce, and biotech. The global ex U.S. technology sector was easily the best performer, returning 47% during the year. Consumer cyclical, communication services, and basic materials sectors all gained around 20%. Winners included the likes of Canadian e-commerce platform company Shopify (SHOP), whose shares nearly tripled during the year. Stocks that entered the year with poor momentum and low valuations, such as financials and energy, continued to lag. The former fell 4.0% while the latter declined 22.5%, owing in part to plummeting oil prices in the first quarter.

The growth-value dynamic reversed some in the fourth quarter. Optimism following promising news on coronavirus vaccines drove the MSCI ACWI ex USA up 17%, but this time value stocks performed best. Companies in industries badly hurt by the pandemic’s effects, such as airlines and credit-sensitive financials, saw the strongest recoveries. The year closed on a positive note as the U.K. and the European Union finally reached a Brexit trade deal, though the news was met with a muted reaction as the markets had largely priced the event in.

Category-Leading Funds
Vanguard International Growth (VWIGX), which has a Morningstar Analyst Rating of Gold, posted a whopping 59.6% return during the year, placing it in the top decile of foreign large-growth Morningstar Category peers. Subadvisors Baillie Gifford and Schroders look for underappreciated growth stocks and make way for some more aggressive bets. Rapid growers like Argentinian e-commerce firm MercardoLibre (MELI) and Chinese Internet giant Tencent Holdings helped power the fund’s stellar year. The former returned 192%, while the latter gained a comparatively modest 52%. Other key holdings included Japanese healthcare platform M3 Inc. and Dutch photolithography company ASML Holding NV (ASML). The fund also benefited from a meaningful stake in electric auto manufacturer Tesla (TSLA), whose shares rose over 700%. While the fund’s U.S. exposure is greater than peers, its international holdings drove the bulk of its success.

Manager Pierre Py of Silver-rated Phaeacian Accent International Value will let cash build up when he can’t find enough attractive opportunities, and while that can be a double-edged sword, it was a big positive in 2020. The fund excelled as it entered the year with nearly 35% of assets in cash, which muted the pain of the first-quarter bear market, but it also captured much of the upside during the subsequent recovery as Py was quick to buy stocks on weakness. Names like Dutch specialty chemical company Koninklijke DSM NV and British industrial distributor Electrocomponents were profitable additions. The fund’s 19.6% return in 2020 placed it in the top decile of foreign small/mid-blend category peers.

Funds That Lagged
Bronze-rated Artisan International (ARTIX) gained 7.6% in 2020, a decent return in an absolute sense, but it ranked in the bottom decile of foreign large-growth category peers. Manager Mark Yockey pursues a diverse array of growth themes, but some didn’t pan out. The fund fell about 3.5 percentage points more than its MSCI EAFE Growth Index benchmark through the market’s late-March trough, but also trailed in the latter stage of the recovery. Positions in plane builder Airbus SE (EADSF) and Brazilian oil giant Petrobras (PBR) caused much of the pain. Out-of-benchmark holdings in capital markets companies such as Deutsche Boerse AG, UBS Group AG (UBSG), and Amundi (AMDUF) held up better but still detracted from relative performance.

Silver-rated T. Rowe Price International Disciplined Equity (PRCNX) gained just 4.4% on the year, placing it in the bottom quartile of foreign large-blend category peers. However, lead manager Federico Santilli’s preference for value stocks explains much of its woes. During 2020, the fund held an average of 2% of assets in the growth-heavy technology sector, the top-performing segment, versus 8% for the MSCI EAFE Index. The fund’s average valuation metrics like price/sales were below the category average as of Sept. 30, while dividend yield came in higher, further highlighting the style skew. An overweighting in small- and mid-cap companies also hurt relative results as larger companies outperformed.


Adam Sabban has a position in the following securities mentioned above: VWIGX. Find out about Morningstar’s editorial policies.