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More Gains for International-Equity Funds in the Third Quarter

Strong growth in Asia, especially China, drives stellar emerging-markets returns.

Securities In This Article
Subaru Corp
Principal Diversified Intl Inst
Seven & i Holdings Co Ltd
Taiwan Semiconductor Manufacturing Co Ltd
Greggs PLC

International equities continued to post gains in 2020's third quarter, though they were more muted than the previous quarter's sharp market rebound. Continued widespread uncertainty surrounding the global pandemic did not hold the markets back during the third quarter; as the global death toll from the coronavirus exceeded 1 million, the MSCI All Country World Index ex USA grew 6.3%.

Many market trends persisted during the third quarter. The long-standing growth-value disparity pressed on, as the foreign large-growth and foreign small/mid-growth Morningstar Categories surpassed their value counterparts by 6.6 and 4.6 percentage points, respectively, in the quarter. In the face of increased COVID-19 daily case counts, political uncertainty, and civil unrest, the U.S. markets bested international markets; the broad Russell 3000 Index returned 9.2% over the period, outpacing the foreign proxy by 3.0 percentage points. Similar to last quarter, emerging markets outperformed developed markets. The MSCI Emerging Markets Index rose 9.6% versus the MSCI EAFE Index's 4.8% gain from June through September. Strong growth in Asian markets propelled emerging-markets returns.

China's third-quarter market performance wowed despite ongoing U.S.-China geopolitical tensions. The MSCI China Index rose 12.5% over the three-month period. President Donald Trump banned Tencent's WeChat in the United States and attempted to force the sale of popular video app TikTok, owned by China-based parent firm ByteDance, because of security concerns. Though Trump approved TikTok's proposed sale to Oracle ORCL and Walmart WMT, uncertainty remains around the deal. In July, the U.S. ordered China to close its consulate in Houston, and China retaliated by demanding the U.S. close the embassy in Chengdu. The U.S. also imposed sanctions against China for restricting autonomy in Hong Kong under the region's new national security law.

Among the third quarter's standout fund performers was Artisan Global Opportunities ARTRX, which has a Morningstar Analyst Rating of Bronze. The strategy rose 14.0% and ranked in the top decile of its world large-stock category over the quarter thanks to a favorable growth tilt as well as strong technology and healthcare picks, such as virtual conferencing platform Zoom Video Communications ZM and Swiss pharmaceuticals and biotech company Lonza Group. This experienced team's outperformance is not limited to 2020's third quarter; the strategy's emphasis on competitively advantaged firms poised for profit growth has resulted in strong downside protection and attractive returns relative to its bogy since the team took the helm in September 2013.

Bronze-rated Principal Diversified International PIIIX also benefited from its growth tilt and strong stock-picking in the third quarter. The strategy's 9.2% gain from the start of July through September 2020 topped the MSCI ACWI ex USA's 6.3% growth and outpaced 94% of foreign large-blend category peers. A stable and seasoned comanager duo impressed over the quarter with strong bets in Japan, Taiwan, and the United Kingdom. Top-five weighting Taiwan Semiconductor Manufacturing Company TSM was among the leading contributors during the period.

Theme-driven Ivy International Core Equity IVIAX, which sports an Analyst Rating of Bronze, had a tougher go in the third quarter. The strategy gained 4.0% versus the MSCI ACWI ex USA's 6.3% climb and the foreign large-blend category average's 5.8%. Though the team focuses on risk management and emphasizes defensive portfolio constituents, the strategy struggled to keep pace with its benchmark and peers during the first-quarter market plunge and the subsequent rally. The team's consumer picks hurt returns; overweightings in automobile manufacturer Subaru and 7-Eleven parent firm Seven & i Holdings were among the portfolio's notable laggards.

A value-conscious process and weak stock-picking resulted in a tepid third quarter for Silver-rated MFS International New Discovery MWNIX relative to its index and peers. The strategy rose 9.1% from July through September, lagging the MSCI ACWI ex USA SMID Growth by 2.1 percentage points and falling behind 91% of foreign small/mid-growth category peers. The strategy's consumer discretionary picks fell flat, with names such as U.K.-based food brand Greggs trailing the sector. The fund also suffered from an underweighting in Nordic countries. Still, the experienced team has managed to outperform in most down markets with less volatility than the index over longer stretches.

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About the Author

Claire Butz

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Claire Butz is a manager research analyst for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. She covers equity strategies.

Before her current position, Butz worked as a product consultant for Morningstar Office, the firm’s portfolio management platform for financial advisors. Additionally, she spent two summers at Morningstar, one of which was spent on the equity strategies team.

Butz holds a bachelor’s degree in cognitive science from the University of Michigan.

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