3 Avenues Into Value and Foreign Stock Funds

Christine Benz: Hi. I'm Christine Benz from morningstar.com. For investors looking to reposition their portfolios after a strong rally in U.S. growth stocks, a couple of themes stand out: foreign stocks and value. Joining me to discuss why those areas might be worth a look, as well as to share a few picks that converge around those themes, is Russ Kinnel. He's Morningstar's Director of Manager Research. Russ, thank you so much for being here.

Russ Kinnel: Glad to be here.

Benz: So Russ, let's take these one by one, starting with value. Value, of course, has been under a cloud for the better part of a decade. Why should investors make sure that their portfolios have at least some exposure to value stocks?

Kinnel: I think value looks terrible right now any way you slice it. The gap, particularly between small value and small growth, but even large value and large growth, is enormous, and obviously there's some good reasons for it. For instance, the companies like Amazon and Google are just taking away businesses left and right. Really, if you think about retailers on the value side fighting with Amazon on the growth side, we know who's winning that. As well as now we have a recession on, and that means value stocks tend to be much more economically sensitive, if you think about a lot of manufacturers as well as banks, and so they're all having a hard time. And really from the last bear market back in '09, growth has just crushed value, so in a way it's a hard case to make.

But as a contrarian you can also say, "Well, that's the reason you should have some, is that we know these things are cyclical, and historically value has actually done a little bit better than growth." I wouldn't bet the ranch that that's going to happen, but as you imply, it doesn't make sense to completely avoid it because there are other times when value has done much better than growth. If we go back to some other bear markets and some other rallies, value often has had long runs against growth, and so when you think about diversification, that's the whole point is, you want to have these different elements that do well at different times. So I don't think you want to give up on value.

Benz: How about foreign stocks? That's been a tough case to make for investors about why they should keep the faith in maintaining a globally diversified portfolio. But let's talk about your perspective on that issue.

Kinnel: Yeah. I think it's another area where you go in these cycles, and the U.S. has done better than most foreign markets lately, and then of course on top of that, the foreign markets sold off with the U.S. markets in February and March. So people might say, "Well, there's no point to diversification if they're all going to move the same." But again, over the long cycles we see foreign often does do better than the U.S., so I don't think it makes sense to avoid foreign. If you think about some of the great global brands, some of the great global companies, some of those are foreign. You think about some of the really strong growing economies like in China, and do you really want to avoid those? I don't think you should. So again, I think it makes sense to have some in foreign.

Benz: For investors who want to make sure that they have exposure to these two unloved areas, you brought a few picks that bring both foreign stocks and value together, so some foreign value-leaning stock funds. Let's start with the first one. That's Causeway International Value CIVVX. It's Gold-rated. Performance doesn't look that great certainly year-to-date, but you and the team have liked it for a long time. Let's talk about the thesis for this fund Russ.

Kinnel: Our basic thesis is good people, good strategy, but a strategy that's been out of favor for a while, and that's why you see poor performance. Harry Hartford and Sarah Ketterer have been running this strategy for a long time, and the long-term record is good, and they had a good record at a previous fund, but the more recent record here is not good. But I think they picked out a very disciplined value approach that I think just really works well for long haul, and when value and foreign equities do come back, I think this fund has a lot of potential.

Benz: So this is one I know that has historically downplayed emerging-markets equities. Is that still the case?

Kinnel: That's right. They have the unusual feature of avoiding emerging markets in this fund, which makes it a little bit different from your typical foreign fund, which might have 5% to 10%, or 15% in emerging markets. So if you do go for this fund, you're going to want to find a dedicated emerging-markets fund to add to your portfolio most likely.

Benz: Let's talk about Dodge & Cox International Stock DODFX, also Gold-rated foreign stock fund in the international large-cap value category. Let's talk about why you and the team like this one.

Kinnel: That's right. This is another one where it's probably a hard sell because the record's not been great, but really all the fundamentals are there for this fund. Dodge has great managers. It's pretty much a team approach, great analysts, who really make a career there, and really good disciplined value approach. Not quite as deep-value as Causeway, but they do like financials, which have been hit hard, but long-term this is just a very good fund. Virtually all the managers have a million dollars or more of their own money in the fund, and so I think really an appealing fund. Nice low expense ratio, which I love in an actively managed fund. So a lot of appeal outside of the recent performance.

Benz: One thing I noticed with this fund, Russ, is that it has a really nice yield, and I know a lot of people, especially retired folks, like yield. Is that a reason to investigate foreign stocks? Are the yields sometimes more attractive?

Kinnel: Yes, especially after their sell-off you do get a good yield, so you don't want to go out and screen on the highest-yielding foreign equity funds, because that would be a really bad idea. But I do think it is a nice, appealing way to add a little income, especially now when a lot of your core bond fund yields have declined significantly, especially anything with government. So it's a nice way to add a little bit of income. Obviously, you have to recognize that unlike those core bond funds, you've got a lot of risk involved, and this is a long-term investment. But I do think it is an appealing way to get some income that people probably overlooked.

Benz: Your last pick is T. Rowe Price International Value TRIGX. In contrast with the first two, which I think we've talked a lot about over the years, this one may be a little less familiar. Let's talk about the thesis for this Bronze-rated fund.

Kinnel: It is a different story here. It's Bronze-rated, not Gold, and it's only recently upgraded to Bronze from Neutral. The reason is, T. Rowe was kind of in portfolio manager limbo for a while with this fund as they brought in some interim managers, and said they weren't sure who was going to run it long-term. Then they broke from the T. Rowe mold. They hired Colin McQueen from outside of T. Rowe. He's someone with 30 years of industry experience, so very good experienced manager with a good track record at multiple stops prior to T. Rowe. So even though he only came on board in 2019, we still have a lot of confidence, and of course T. Rowe's got very good analysts. It's a fairly straightforward value fund looking for good companies with good financials that happen to be temporarily out of favor, but we see a lot of potential there.

Benz: Russ, thank you so much for being here to provide these picks and to share your perspective on international and value investing.

Kinnel: You're welcome.

Christine Benz: Thanks for watching. I'm Christine Benz from morningstar.com.