Visitors admire the view of Paris after the Eiffel Tower reopened for the first time in over eight months.
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The U.S. leads the world in vaccine rollout and economic recovery—and for U.S. stockpickers, that’s the bad news.
U.S. stocks are pricey; the S&P 500 index trades at nearly 24 times this year’s estimated earnings, verus an average of 16.6 over the past 15 years. It’s time to look abroad for opportunities. Stocks in most other countries—developed or emerging—are still much cheaper than their U.S. peers. Those economies may be recovering more slowly, but they are recovering. And as they do, their local businesses will improve and those stocks will have further to run.
Finding value abroad can be tricky, however. Local risks, like unregulated capital markets and accounting fraud, are harder to gauge from afar. And it helps to be on the ground to tell the difference between companies that are primed for a rebound and those that are cheap for a reason.
Instead of a broad index fund, investors are better off in the hands of experienced active managers who can find cheap, high-quality stocks. Barron’s found a few international value funds, each tilted toward different countries and industries, that have strong track records and solid performance this year. All have returned 9% to 11% annually over the past five years, and rank in the top decile among peers.
Russia is a particularly tricky area to navigate, given the political and economic risks, but Alissa Corcoran, director of research for the $460 million Kopernik International fund (ticker: KGIIX), says that some companies there are trading at a much deeper discount than they deserve. The fund has a quarter of its portfolio in Russian stocks, mostly utilities and energy companies. Hydroelectric power giant RusHydro (HYDR.Russia), for example, trades at just eight times earnings, while U.S. utility firms generally trade at more than 20 times. The fund also owns gold miners as a hedge against the economic cycle. Newcrest Mining (NCM.Australia), Wheaton Precious Metals (WPM.Canada), and Polyus (PLZL.Russia) are all among its largest holdings.
Corcoran also likes many Japanese companies, which have been very conservative with their balance sheets. “They’ve been building up cash positions, which gives them the option to raise dividends or buy their own shares back,” she says.
David Herro, portfolio manager of the $27 billion Oakmark International (OAKIX) has a different opinion. The fund has very few holdings in Japanese firms. Too much cash on a balance sheet can be a drag on a company’s returns on equity, he says, since cash has essentially zero yield. “We love financial strength and stability,” he adds, “but you don’t want too much of anything.”
Instead, Herro is very bullish on European financial stocks. The group has been punished for the better part of the past decade due to low and negative interest rates, but it’s well positioned to take off if the European central banks start raising interest rates in the face of an overheated economy. “This should be a huge shot in the arm for financials,” he says. Two-thirds of the fund’s portfolio is in continental European stocks, with another 16% in the United Kingdom. Lloyds Banking Group (LLOY.UK) and Intesa Sanpaolo (ISP.Italy) are two of its top holdings.
The $1.1 billion Pear Tree Polaris Foreign Value Small Cap fund (QUSOX) has sizable holdings in developed Asian markets like Japan, South Korea, and Taiwan, because that’s where the high-quality small firms are, says portfolio co-managers Sumanta Biswas and Bin Xiao. “We look for steady, sustainable cash flows,” says Xiao.
Many Chinese firms also meet the fund’s valuation criteria, but the co-managers have been very cautious due to the corporate governance risks. “We have seen many mishaps happening in China,” says Biswas. “The companies that are really good are already expensive.”
Write to Evie Liu at [email protected]
