The First Quarter in International Stock Funds

International equities continued to rise in 2021’s first quarter, though at a slower pace than in 2020’s final frame when optimism about coronavirus vaccine approvals fueled double-digit gains. As the global vaccination effort ramped up, The Morningstar Global Markets ex U.S. Index reached a record high in mid-February and finished the quarter up 3.8%. It lagged its domestic counterpart, the Morningstar U.S. Market Index, which gained 5.5%.

Energy and financials--the hardest-hit sectors in 2020--led the way. The Morningstar Global Energy Index and Morningstar Global Financial Services Index posted the largest gains of 18.8% and 11.1%, respectively, as energy prices recovered from lockdown lows and the yield curve steepened. Gains in other sectors were more modest, with consumer staples and healthcare edging into the red. The once high-flying tech sector showed signs of coming back down to earth, with the Morningstar Global Technology Index gaining just 0.9% versus 16.9% in the previous quarter. Surging U.S. Treasury yields hurt the growthy tech sector, and renewed concerns about delisting Chinese companies on American stock exchanges pushed many U.S.-traded Chinese stocks into bear-market territory. JD.com JD, Tencent, and Baidu BIDU all finished the quarter more than 20% off their recent highs, while Alibaba BABA was down 17%.

Developed-markets stocks outperformed emerging-markets stocks, with the Morningstar Developed Markets ex U.S. Index gaining 4.3% last quarter versus the Morningstar Emerging Markets Index’s 2.8%. However, the gains masked a bumpier ride as the emerging-markets index was down about 10 percentage points off its February high. Latin American stocks fell especially hard in the sell-off. The Morningstar Emerging Markets Americas Index fell 6.3% last quarter after gaining 34.5% in the previous quarter. Within developed markets, Canadian stocks posted the largest gains of 9.2%, followed closely by Hong Kong and the United Kingdom.

Value stocks’ resurgence relative to growth stocks, which started in late 2020, picked up steam last quarter. The foreign large-value Morningstar Category gained 8% versus foreign large-growth’s 0.6%. Similarly, foreign small/mid-value gained 8.8% against foreign small/mid-growth’s 1.3%. U.S. stocks followed the same pattern, with value beating growth across the market-cap spectrum.

Leaders

Oakmark International OAKIX Rebounding financials and other cyclical stocks fueled Oakmark International's strong first quarter. It gained 9.8%, landing in the foreign large-blend category's top percentile. On April 1, it moved to the foreign large-value category, where it ranked in the top quartile. Veteran contrarian David Herro stood with or added to long-standing stakes in European financials, automakers, and industrials in 2020's bear market when investors priced them as if their earnings would collapse with the global economy. He thought they were in better shape than in the 2007-09 crisis. This paid off last quarter as Lloyds, Intesa Sanpaolo, and BNP Paribas were top contributors; so were miner Glencore, carmaker Daimler, and tractor manufacturer CNH Industrial. The fund's large helping of more economically sensitive stocks has made it more volatile than its peers and benchmark. Buying out-of-favor stocks can cut both ways, as the fund's stake in Credit Suisse CS shows. The controversial Swiss bank lost 17.2% last quarter owing to potential legal liabilities from the Greenhill Capital collapse and a potential multi-billion-dollar loss from its exposure to defaulting hedge fund Archegos Capital.

DFA International Value DFIVX Value's resurgence lifted DFA International Value. This strategy gained 12.7% last quarter and finished in the foreign large-value category's third percentile. The focus on cheap stocks hurt in 2020's first-quarter sell-off when the fund fell harder than even its large-value peers. The portfolio's exposure to improving cyclical sectors helped more recently. Large positions in energy firms Royal Dutch Shell RDS.A and Total TOT were the largest contributors last quarter, as were auto manufacturers Daimler, Volkswagen, and Stellantis. Minimal exposure to more sluggish emerging markets also gave the fund a leg up versus peers.

Dodge & Cox Global Stock DODWX Energy and financials stocks helped Dodge & Cox Global Stock post a strong quarter. Substantial overweightings in each sector and strong picks within them helped the fund gain 12.9% and land in the fourth percentile among world large stock peers. The managers often take advantage of bad news or tough economic environments to pick up strong business on the cheap. Indeed, the team added to top holdings Wells Fargo WFC, Capital One COF, and Suncor Energy SU following 2020's sell-off, and these contrarian bets were top contributors last quarter.

Laggards

MFS International Intrinsic Value MGIAX Despite its name, MFS International Intrinsic Value has been in the foreign large-growth category for several years. Its 2% loss last quarter placed it in in the category's bottom quintile. The quality-oriented approach is flexible and has no sector or country constraints. The managers look for companies with differentiated and durable business models, healthy balance sheets, and valuations they consider cheap. Stock-picking drives sector and country weightings, and the result often stands out. The fund's 29% stake in consumer defensives last quarter was nearly 3 times greater than the category average, which held back returns as staples trailed their cyclical counterparts. The fund's 7-percentage-point overweighting in Japanese stocks also hurt as they lagged other developed Asia stocks.

Invesco Emerging Markets All Cap GTDDX Invesco Emerging Markets All Cap has one of the largest allocations to Latin America in the diversified emerging-markets category. At nearly 21% of assets, it's more than twice that of the average peer. The region's weak performance last quarter hit this fund particularly hard. Its 0.3% gain landed in the category's bottom quintile. Nearly all its Latin America holdings are in Brazil and Mexico, where the portfolio has been overweight in recent years. Stock exchanges B3 SA and Bolsa Mexicana de Valores saw the steepest losses at 20% and 15%, respectively.

Vanguard International Growth VWIGX Subadvisors' Baillie Gifford and Schroders' consistent ability to identify compelling growth stocks puts them among the best foreign large-growth funds. Growth, however, hurt last quarter. The strategy's 1.3% loss landed in the category's bottom quintile. Weaker results among consumer cyclical holdings, which make up one third of fund assets, were a drag. Chinese electric vehicle manufacturer Nio and e-commerce behemoth Alibaba were big detractors. A 30% decline for top holding Tesla TSLA off its peak in January also hurt.