A Highly Rated, Sensible Approach to International Stocks

The following is our latest Fund Analyst Report for American Funds Intl Gr and Inc A IGAAX. Morningstar Premium Members have access to full analyst reports such as this for more than 1,000 of the largest and best mutual funds. Not a Premium Member? Gain full access to our analyst reports and advanced tools immediately when you try Morningstar Premium free for 14 days.

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.

Items that might seem worthy of concern at American Funds International Growth and Income are actually not worrisome. Its attributes earn it a Morningstar Analyst Rating of Gold.

A glance at this fund's manager lineup shows that one, Michael Cohen, has only been on the fund for a year, and another, Leo Hee, for four years. Those might seem like unusually low figures for one of the American Funds, where tenures are often much longer. But Cohen has much experience. He's been with Capital Group (advisor to the American Funds) for 19 years and has been a listed manager on similar sibling Capital World Growth and Income CWGIX since 2014 (and had an earlier stint there as well). Hee joined Capital Group 15 years ago and was an analyst for years before becoming a manager on this fund. The other three managers have been in place since at least 2010 and with Capital Group for 20 years or more. The managers run their sleeves of the portfolio independently, using different styles.

The fund's income mandate could also make some investors hesitate, for companies that pay out the highest dividends can be taking risks to make those payouts or could be contemplating cutting that dividend, hitting the share price. But this fund's managers are not looking for particularly high yields and need not settle for such firms. Rather, the portfolio of each manager--and the fund overall--must post a yield equal to that of the MSCI ACWI ex USA Index plus the expense ratio of the R6 share class. That's a fairly modest target.

The A shares' trailing 10-year return of 5.4%, annualized, through August 2019 topped the 4.7% returns posted by both the foreign large-blend Morningstar Category and the MSCI ACWI ex USA Index, The fund has typically held up better than both in downturns, but in the rough fourth quarter of 2018 its loss basically matched that of the index and beat the category average by only about 1 percentage point. That's instructive; while firms paying a reasonable dividend tend to have solid fundamentals, this fund, which currently leans toward the growthier side of blend and has a substantial emerging-markets stake, will not always play a defensive role.

Performance | Positive | by Gregg Wolper Sept. 20, 2019 This fund receives a Positive Performance rating. Its October 2008 launch, in the midst of the financial crisis, seemed poorly timed, but its huge cash stake curbed losses and allowed managers to buy at depressed valuations. That said, a more representative indication of the fund's performance is its trailing 10-year record, which begins after the worst of the financial crisis had abated and the stock market had begun its recovery. Through August 2019, the A shares' 10-year return of 5.4%, annualized, topped the 4.7% returns posted by both the foreign large-blend category and the MSCI ACWI ex USA Index. The fund has typically held up better than both measures in downturns, as in 2011, when the fund, though suffering a 7.5% loss, beat the index and category average by more than 6 percentage points each. In the rough fourth quarter of 2018, though, the fund lost about the same amount as the index, and it topped the category's average decline by only about 1 percentage point.

Its income focus and cash stake can cause the fund to lag when markets surge, but that's not guaranteed; the fund topped either the category average or the index in the strong rally years of 2013 and 2017. The fund's proclivity for emerging markets, which can help provide a boost when investors are exuberant, can also be a liability. That was the case most notably in 2015, when the fund lost much more than the index and the category average.

Price | Positive | by Gregg Wolper Sept. 20, 2019 Relatively low fees earn the fund a Positive Price Pillar rating. The expense ratios of its various share classes are consistently lower than the norm for rivals in their respective distribution channels. The fund's brokerage costs are also below average.

Process | Positive | by Gregg Wolper Sept. 20, 2019 The reasonable approach this fund takes in pursuing income along with capital appreciation earns a Positive Process rating. Its managers focus on attractively valued foreign large-cap stocks that pay respectable or at least growing dividends. They are not searching for the highest payers and will even invest in nondividend payers. Each manager's portfolio must provide a yield that matches the MSCI ACWI ex USA Index plus the expense ratio of the fund's R6 shares. This moderate income objective doesn't force the managers to stretch for yield.

The fund's income mandate can lead to certain sector preferences. It has tended to have an overweighting in telecommunications and utilities, but it doesn't always, and it can have an overweighting in a sector such as technology, which is not known for providing hefty dividends.

Each manager (and a group of analysts) runs a separate sleeve of the overall portfolio. Other than meeting the yield hurdle, the managers can pursue opportunities of their own choosing. They are allowed, even encouraged, to stick to their own investing styles, with the fund overseer charged with making sure these styles complement one another. The managers do share one trait: patience. The fund's annual turnover is lower than average, and managers often keep stocks for many years. They're quite willing to explore emerging markets, so the fund's exposure there is consistently above average.

The fund's June 30, 2019, portfolio held about 225 stocks, most of which pay dividends. This was an increase from the 170-200 range of recent years. The dividend focus has helped limit volatility over time, as has the managers' willingness to hold cash when opportunities are scarce. As of the June portfolio, the cash level was about 6% of assets. The fund's stake in companies domiciled in emerging markets also was much higher than average, as usual. With about 23% of its stock assets in emerging markets (using MSCI classifications, which includes South Korea and Taiwan), the fund's stake was about even with its emerging-markets-heavy MSCI ACWI ex USA benchmark's, and much higher than the foreign large-blend category average.

Conversely, this fund's managers were finding many fewer opportunities in Japan than their peers. That's not unusual here, partly because Japan generally isn't a great hunting ground for the type of dividends these managers prefer. The fund's Japan stake of just 6.5% of its stock portfolio was less than half the index's weighting and also much lower than the stakes of most foreign large-blend funds.

In the June portfolio, the top holdings took up just below 3% of assets. The portfolio spreads assets widely among its companies, which helps limit exposure to a problem in any one stock. Sector weightings are generally not too far out of line with those of the index.

People | Positive | by Gregg Wolper Sept. 20, 2019 American Funds uses its multimanager approach on this fund, dividing the assets between five named managers and another sleeve of the portfolio run by research analysts. There may also be undisclosed managers who oversee relatively small slices of the portfolio prior to the firm naming them publicly. The firm uses this practice to develop talent and ease succession.

In October 2015, parent Capital Group began splitting this fund's assets between subsidiaries Capital International Investors (CII) and Capital World Investors (CWI), which operate separately. Steven Watson (based in Hong Kong) of CII heads up the whole fund. He had been CII's only named manager on this fund until July 2018 when Leo Hee (Hong Kong) transitioned from being an undisclosed manager to a named manager. Andrew Suzman (New York) heads up CWI's side, which also includes Patrice Collette (Singapore) and Michael Cohen (London), who joined in July 2018 (switching to CWI from CII at that time). Also in July, Carl Kawaja of CWI, who'd been managing a slice of this fund since its 2008 inception, dropped off the roster. Watson and Suzman also have been named managers on this fund since its 2008 inception, while Collette has been on board since 2010. Watson and Suzman help to ensure that the managers' investing styles complement one another. The named managers are all Capital Group veterans. Overall, the fund receives a Positive rating for People.

Parent | Positive July 25, 2019 Capital Group is a model steward in many respects and merits a Positive Parent rating. More widely known in the United States for its American Funds lineup than in the rest of the world, the active manager boasts very reliable equity and allocation offerings. The firm's multimanager system drives its success. Dividing each fund into independently run sleeves lets managers invest in line with their styles, enhancing diversification and reducing the overall portfolio's volatility. The funds' analyst-led research portfolios help develop the next generation and recruit top talent with the promise of running money from the start. The result is an investment culture marked by lengthy tenures, strong manager fund ownership, and competitive long-term records.

Capital's efforts to bolster its fixed-income operations are bearing fruit. It now has the tools to compete with the best bond shops, and the talent. It has added six veteran managers since 2015, including Pramod Atluri, who was nominated for Morningstar's 2019 Rising Talent award.

Capital aims to unbundle distribution from investment management, which should play to its strengths as a low-cost active manager. Still, it has yet to disentangle all its clean shares from revenue sharing. With its lineup expanding globally, Capital should also clarify its approach to capacity, including what would cause it to close a strategy to protect current shareholders.