An Eclectic and Edgy International Fund
Newly rated Davis International has low fees and a talented stock-picker at the helm.
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A large asset-allocation team, solid underlying managers, and low fees solidify T. Rowe Price Retirement Balanced's Morningstar Analyst Rating of Silver.
This fund served as the landing point in the firm's Retirement target-date series from 2002 until 2004, when the glide path stopped derisking at 40% in equities 10 years past retirement. In 2004, the firm revisited the glide path and decided to continue trimming equities until 30 years past retirement; at that point, the stock weighting levels off at 20%. As a result, this fund was eventually decoupled from the series.
Davis International’s talented stock-picker and modest fees merit a Morningstar Analyst Rating of Bronze for its cheaper Y shares, while its pricier A and C shares get a Neutral. While this was never a tame fund, manager Danton Goei’s picky, value-sensitive approach has led him to amplify the portfolio’s risks since taking sole charge in 2016. The number of stocks has dropped to the 30s from the 50s. Meanwhile, the percentage of assets in the top 10 holdings climbed to nearly 60% from 37%. Nor is the portfolio diversified across sectors and regions versus the MSCI All-Country World Ex-U.S. Index or its foreign large-blend Morningstar Category peers. It has a sizable weighting in online retailers, such as top-five holding Alibaba (BABA), and leans massively toward emerging markets, especially China. Indeed, exposure to Chinese firms, including relatively illiquid shares of private companies like ride-hailing service Didi Chuxing, has since 2017 ranged from 30% to 40%, among the highest out of roughly 250 peers. Allying its fortunes with Chinese companies to such a degree can help or hurt in any given year. Outsize returns in 2017 from Alibaba, JD.com (JD), and New Oriental Education & Technology Group (EDU) helped propel the Y shares’ top-decile finish that year. Yet, those same stocks detracted in 2018 and the fund had one of the category’s worst showings. The fund has rebounded thus far in 2019’s rally, but its struggles in downturns, like 2018’s severe correction, now weigh on its long-term record. Investors shouldn’t panic, though. Goei owns most but not all of the fund’s record since its late 2006 inception. The fund began its life a multimanager offering and Goei was one of four sleeve managers. His results far surpassed those of his peers, who departed in 2009, 2014, and 2015, respectively. Goei’s calculated bets have a good shot of rewarding its Y shareholders who can hold on, but they must have a big appetite for risk to do so.
Process | Average
Manager Danton Goei's eclectic and edgy stock-picking skill remains promising, but his willingness to push the boundaries at the portfolio level keeps the fund’s Process at Average. Goei is a value investor in that he seeks a margin of safety in stocks trading at discounts to his estimates of their intrinsic value. His idea of value has extended to public as well as private companies with competitive advantages that are spending cash flow almost as fast as they generate it to grab market share and build their businesses, such as Amazon.com (AMZN) and China's Didi Chuxing. Goei often doubles down on stocks whose share prices plummet, which can cause outsize gains when they rebound and ascend to new heights or magnify losses when they don’t come back and he eventually sells them. To keep risk in check, he segments investments into contrarian picks, out-of-spotlight names, and market leaders with strong balance sheets, where he aims to allocate most of the assets. Goei’s efforts to root the portfolio in market leaders notwithstanding, its risks have multiplied since he took sole charge in 2016. Its concentration in individual companies has increased as has its stakes in countries like China. Meanwhile, he has invested up to 10% of assets in relatively illiquid private placements. All of this has led to extreme volatility.
This fund has no trouble playing offense. It sports a concentrated portfolio of 30 to 40 stocks with its top 10 holdings sometimes exceeding 55% of assets. Danton Goei picks international stocks without regard for the market-capitalization, sector, or geographic characteristics of the MSCI All-Country World Ex-U.S. Index. Since taking control of the whole portfolio in 2016, he's kept a sizable weighting in online retail and tilted the equity portfolio toward emerging markets, with that weight (excluding South Korea and Taiwan) exceeding 55% at its peak. The fund’s holdings lean massively toward Asia, especially China. As of September 2019, the strategy's 55% allocation to Asian firms, mostly in China, was the foreign large-blend category's highest out of about 250 peers. The fund's Chinese stocks range from Alibaba Group (BABA) to ride-sharing service Didi Chuxing, which is a private and more illiquid holding. The fund has its share of traditional value stocks, too, such as Dankse Bank DANSKE and Canadian oil and gas company Encana (ECA). Goei has also found more cautious ways to invest in high-flying growth stocks, such as buying South African media company Naspers (NPN) for exposure to Chinese gaming company Tencent (TCEHY). Still, this is an aggressive portfolio; Goei will tolerate higher traditional valuation metrics if his owner earnings' yield estimates for stocks remain attractive.
People | Above Average | by Alec Lucas
Davis veteran Danton Goei managed a sizable portion of this fund from its late-2006 inception until 2016, when he took over the whole portfolio. That bodes well for the fund, earning it an Above Average People Pillar rating. The fund initially used an analyst-led multimanager approach that divided its asset base into independent sleeves run by Goei and fellow analysts Jae Chung, Stephen Chen, and Tania Pouschine. Firm CEO Christopher Davis allocated capital between the sleeves but did not manage money. Goei's sleeve drove the fund's outperformance over the years, and in 2014 the firm promoted him to full-time portfolio manager and named him on its flagship strategies Davis New York Venture (NYVTX) and Clipper (CFIMX). Meanwhile, the other analysts' sleeves did not fare as well. Chung left the firm in 2009, Chen in 2014, and Pouschine at year-end 2015, leaving Goei as the last manager standing. He invests more than $1 million here and more than $5.8 million in total across the lineup. Investment personnel turnover at Davis has been significant. In addition to the departures already noted, the firm dismissed manager Ken Feinberg in late 2013. Yet, the current seven-person analyst team has an experienced core. Three analysts joined Davis between 1995 and 2008, and Kent Whitaker, who rejoined in 2014, had a prior stint between 1999 and 2005.
Parent | Above Average
Davis Advisors retains an Above Average Parent rating as its strengths outweigh its weaknesses. The U.S. equity-oriented shop is a standout in many respects. Davis family leadership has been a source of stability for 50 years and counting. The firm has also made room for nonfamily members, including Danton Goei, who is a full portfolio manager alongside CEO Christopher Davis. The flagship Davis New York Venture has fared well over the past two-plus decades through October 2019. While the lineup has struggled since the 2007-09 credit crisis, Davis investment personnel have felt the pain, too, as they invest alongside fundholders at industry-leading levels. The firm has kept its historic expertise in financials companies while venturing with some success into arenas like private placements where active managers can add value. Still, firmwide outflows for more than a decade have begun to take their toll. The pressure to turn around performance has contributed to investment personnel turnover, though none since early 2018. It has also amplified the lineup’s risk profile in terms of increased concentration and the degree of relatively illiquid private placement holdings, which push the boundaries of prudence in open-end vehicles. Indeed, private stakes in the firm’s smaller open-end strategies have exceeded 10% of assets and peaked near 13%, not far from the SEC’s 15% hard cap.
This fund launched in late 2006 but was not available to the public until the start of 2010. Since then, the Y shares’ 4.8% annualized gain through October 2019 was competitive with the 5% gross return of the MSCI All-Country World Index and edged the foreign large-blend category norm by 14 basis points, though at the cost of above-average volatility. The fund’s ups and downs have become more pronounced since manager Danton Goei took sole charge at year-end 2015. While the Y shares’ 6.7% annualized gain from that date through October 2019 beat the peer norm, they trailed the index by 1.3 percentage points and by an even wider gap when adjusted for risk. Goei’s tenure as sole manager has been marked by performance extremes, in large part driven by the fund’s hefty weighting in Chinese stocks like New Oriental Education & Technology Group (EDU) and JD.com (JD). Big gains from both stocks in 2017 helped propel the Y shares’ top-decile 38.4% gain. Those same stocks weighed on results in 2018, though, and the fund’s 20.8% loss was one of the category’s worst. Downside protection has been poor since 2007. In the four periods that the index has dropped at least 20%, the fund lost more. In 2011, the fund built a disastrous top-five position in Sino-Forest, which proved to be a fraudulent timber company. The fund’s 34% peak-to-trough loss that year was 6.7 percentage points worse than the index.
It’s critical to evaluate expenses, as they come directly out of returns. The share class on this report levies a fee that ranks in its Morningstar category’s second-cheapest quintile. Based on our assessment of the fund’s People, Process and Parent pillars in the context of these fees, we think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Bronze.
Alec Lucas has a position in the following securities mentioned above: BABA. Find out about Morningstar’s editorial policies.