Although US stocks have been all the rage this year, top-performing fund managers remain convinced that the most attractive investment opportunities lie in international stocks.
The S&P 500 has outperformed its peers in developed and emerging markets since the depths of the financial crisis, and that streak of outperformance has been especially pronounced in recent years. Its 80% return over the past five years is more than double that of the STOXX Europe 600 and six times higher than the 13% return of Vanguard’s Total International Stock Index ETF (VXUS).
However, any experienced investor can prove that chasing past performance is a mistake. After a spectacular run in the 1990s, those who had bet on U.S. stocks were bitterly disappointed as the group lagged behind foreign-listed stocks over the next decade.
Jeff Germain, director of investments at Brandes Investment Partners and manager of the Brandes International Equity Fund (BIIEX), said in a recent interview with Business Insider that years of poor relative returns have led to a decline in foreign stocks. He said that the valuation of the company was historically low.
Germain said international stocks are trading at their lowest levels compared to U.S. stocks since 1974. While valuation discrepancies are not predictive of short-term returns, Germain noted that stocks trading at deep discounts tend to displace market leaders over the long term. David Kelly, head of global strategy at JPMorgan Asset Management, recently made a similar point.
It’s unclear when the group’s long-awaited reversal will occur, but market veterans are bracing for a seismic shift in the market.
“The companies that were the most discounted internationally actually started to perform better from that point on,” Germain said. “We’re approaching a very low point in history in that regard.”
How to imitate top fund managers — and where to invest now
When Jarman joined Brandes’ flagship international fund in 2010, he could not have predicted how much foreign companies would struggle over the next 15 years.
But tough conditions in international stock markets were no excuse for Jarman and his four co-managers. According to Morningstar, Brandes International Equity Fund has been in the top 10% of its category for the past 10 years, with a goal of being in the top 1% in 2023.
Germain said a “smart contrarian” bottom-up investment process drove its success. He focuses on finding companies with significant profitability and sustainable competitive advantages that are undervalued not only relative to their peers, but also on an absolute basis. I am.
“What we’re doing is just trying to value companies that have quality attributes, and how much are they paying for those attributes, rather than just owning it because of the story? “It’s about being very disciplined in evaluating things,” Germain said.
Germain said that when he and his colleagues find a stock that has been significantly discounted, they conduct up to six weeks’ worth of fundamental research to assess its growth and whether its price is fair or unfair. , said it will help you determine the potential risks and rewards of investing in that stock. .
When fund managers find stocks that meet this requirement, they start thinking more like business owners than stock traders. As a result, his funds hold companies for just under five years on average.
Of all the opportunities in international markets, Jarman is particularly drawn to four stocks from different countries and industries. These are all among his fund’s top 10 largest positions.
heidelberg materials (HDELY) is a German-based cement aggregate company that Germain said should benefit from the upcoming U.S. infrastructure boom caused by legislation like the CHIPS Act. He also believes the company can continue to pass on cost increases to customers.
“Looking back now, obviously we were able to do that and we expanded our profitability,” Germain said. “Again, this causes us to reassess our intrinsic value assessment and continue to maintain that assessment despite good performance.”
Germaine’s other two top ideas are related to the aerospace industry.based in brazil Embraer (ERJ) and headquartered in the UK. rolls royce (Licey).
“It’s clear that the aerospace industry in general, as far as manufacturing airplanes and engines, has been hurt by the coronavirus,” Germain said. “And that part of the market appears to be repairing itself, benefiting many companies that are exposed to it.”
Rolls-Royce is widely known for the luxury cars that bear its name, but it is primarily an engine manufacturer. The company’s stock price has tripled in the past 12 months, but it’s still down about 75% from its peak a decade ago, before production and balance sheet issues arose.
Despite these concerns and the challenges posed by the pandemic, Germaine and his team did their due diligence and rolled the dice on Rolls-Royce. And even after its impressive growth spurt, Germaine sees signs of further improvement for the company.
“If you look at the fundamentals, they’re improving,” Germain said. “Therefore, we have increased the fair value or intrinsic value of that business by a significant percentage, which is why we are still in that business despite the distress. ”
In addition to betting on economically sensitive sectors such as industrials and materials, Germain is also optimistic about: heineken (HEINY), a defensive name for the household essentials group.
The fund manager did not have much exposure to the sector before the pandemic, but has added exposure as investors worry about whether companies will be able to maintain profit margins by passing on price increases to consumers. He said he did. Although these fears were overblown, Heineken stock remains neutral. He hopes the company’s relatively cheap valuation will boost profits.
