Nominees for 2017 International-Stock Fund Manager of the Year
The three candidates have far more than their recent success going for them.
We reviewed the nominees for Morningstar's Domestic-Stock Fund Manager of the Year in our Jan. 11 Fund Spy. This column will discuss the candidates for International-Stock Fund Manager of the Year. Articles announcing the nominees in the other asset classes will run early next week, and the winners will be revealed on Jan. 24, 2018.
International-stock fund managers encountered favorable conditions in 2017. Most developed markets outside the United States, including the Japanese exchange and several of the larger European ones, posted good gains last year amid increased optimism about their economic and corporate prospects.
Many emerging markets posted even stronger returns, and the Chinese exchange earned especially robust gains. What’s more, most foreign currencies strengthened significantly against the U.S. dollar in 2017 (which bolstered the returns of international stocks in U.S. dollar terms). All told, the MSCI ACWI ex USA Index rose 27.2% in U.S. dollar terms last year.
All three nominees took advantage of these favorable conditions and produced superior returns in 2017. But Fund Managers of the Year must be much more than one-year leaders. They need to have earned impressive long-term results. They must employ sound, distinctive, and repeatable strategies, and they and their funds must have other factors in their favor. Their funds also must have Morningstar Analyst Ratings of Silver or Gold.
The three candidates, listed below in alphabetical order of the most prominent fund they run, meet all these criteria.
Sarah Ketterer, Harry Hartford, and team
Causeway International Value (CIVVX)
2017 Return: 27.1%
2017 Morningstar Category Rank (Percentile): 14
This team of eight portfolio managers, which is led by Ketterer and Hartford and which is exceptionally seasoned, employs a distinctive value strategy. In particular, the team uses a combination of fundamental and quantitative analysis to find companies that are attractively priced due to operational—but not financial—distress and have superior long-term risk-adjusted prospects. The result is a relatively low-turnover portfolio of 50 to 60 names which normally looks quite unlike that of the fund’s typical foreign large-value Morningstar Category peer as well as that of its MSCI EAFE benchmark.
The team put its patient and contrarian discipline to very good use in 2017. It built a hefty stake in Volkswagen during the car maker’s emissions scandal, and the company’s stock gained more than 40% last year. Several of the team’s other European holdings flourished in 2017, including the Dutch chemical manufacturer Akzo Nobel (which has been in the portfolio for more than a decade). All told, this Gold-rated fund returned 27.1% last year versus 22.1% for the average foreign large-value offering, 25.0% for the MSCI EAFE Index, and 21.4% for the MSCI EAFE Value Index.
The team’s strategy is aggressive, and its penchant for going its own way can backfire, so the fund can suffer extended slumps. But there’s no arguing with the team’s long-term record. The fund has a 15-year annualized return 9.0% through Dec. 31, versus 7.9% for the average foreign large value offering, 8.1% for the MSCI EAFE Index, and 8.0% for the MSCI EAFE Value Index. The fund is open to new investors.
Rajeev Bhaman and John Delano
Oppenheimer Global (OPPAX)
2017 Return: 36.2%
2017 Morningstar Category Rank (Percentile): 5
A diverse array of this world large-stock fund’s longtime holdings earned superior gains in 2017. For example, the U.S. health insurer Aetna (AET), the Japanese small-motor maker Nidec, and the French luxury-brands company Kering—which have been in the portfolio for six to 13 years each—soared. Thus, this Silver-rated fund returned approximately 13 percentage points more than its average peer and 12 percentage points more than the MSCI ACWI Index last year.
This is no fluke. Bhaman and Delano employ a sound and measured growth-oriented strategy. Specifically, they favor high-quality, innovative firms in industries with long-term structural growth, and because they believe such companies usually maintain their competitive edges, they tend to stick with their picks for years. Annual turnover, in fact, has ranged from just 6% to 22% during Bhaman’s 13-year tenure. (Delano has worked closely with Bhaman on the fund since 2010 and was promoted to comanager in 2017.) The result is a portfolio of roughly 80 stocks that much are different than those of the typical world large-stock fund and the MSCI ACWI Index.
Meanwhile, the managers’ stock selection has often been on the mark in the past. Indeed, since Bhaman came on board in 2004 through December 2017, the fund has an annualized return of 9.3% versus for 7.7% for both its typical rival and the MSCI ACWI Index. (It also outpaced the MSCI ACWI Growth Index during this period.) The fund, which is reasonably priced, is for investors who are seeking long-term global-equity exposure and who understand that it’s growth bias will be counterproductive at times. It is open to new investors.
James Anderson and Thomas Coutts of Baillie Gifford Overseas
Simon Webber of Schroders Investment Management
Vanguard International Growth (VWIGX)
2017 Return: 43.0%
2017 Morningstar Category Rank (Percentile): 6
This multimanager fund’s lineup of subadvisors and managers has evolved significantly over the years. but Baillie Gifford and Schroders have been the only subadvisors since mid-2016. The former has been a subadvisor since 2003 and the latter has been one since 1981, and the two firms have never run less than roughly 85% of the fund’s assets in aggregate. Moreover, Anderson has been a manager on the Baillie Gifford sleeve since 2003, and Coutts worked on that sleeve for several years before he become Anderson’s comanager in 2016, while Webber has been a manager on the Schroders sleeve since 2009. The current roster of subadvisors and managers, therefore, is completely responsible for the fund’s 2017 performance and primarily responsible for its longer-term results.
This Silver-rated fund has thrived over both periods. It benefited greatly from its stakes in Tencent, Alibaba (BABA), and other Internet-related holdings and gained 43.0% last year, whereas the average foreign large-growth fund, the MSCI ACWI ex USA Index, and the MSCI ACWI ex USA Growth Index returned 30.9%, 27.2%, and 31.8%, respectively. This fund has also outpaced its average peer and both indexes by wide margins during the eight years that both Anderson and Webber have been on board.
The Baillie Gifford team takes a sound approach that focuses on firms with good long-term growth prospects and sustainable competitive advantages, while the Schroders team uses a sensible growth-at-a-reasonable-price discipline. The fund also has a low expense ratio that gives it a sizable and ongoing edge. It is important to recognize, however, that the fund has taken on a more pronounced growth bias and increased price risk since Vanguard removed subadvisor M&G in mid-2016. (That firm employed a much more valuation-conscious approach than Baillie Gifford and Schroders do.) The fund is open to new investors.
Morningstar senior analysts Andrew Daniels, Patricia Oey, and Kevin McDevitt contributed to this column.
William Samuel Rocco has a position in the following securities mentioned above: VWIGX. Find out about Morningstar’s editorial policies.