The US is leading the world in vaccine rollouts and economic recovery – and for US stock pickers, that’s the bad news.
US stocks are pricey; the S&P 500 index is trading at nearly 24 times this year’s estimated earnings, up from an average of 16.6 over the past 15 years. It’s time to look for opportunities abroad. Stocks in most other countries, developed or emerging, are still much cheaper than their US counterparts. Those economies may recover more slowly, but they are recovering. And as they do, their local businesses will improve and those inventories will have to run further.
However, finding value abroad can be tricky. Local risks, such as unregulated capital markets and accounting fraud, are more difficult to assess from a distance. And it helps to be on the ground to tell the difference between companies that are ready for a revival and companies that are cheap for a reason.
Rather than a broad index fund, investors are better off in the hands of experienced active managers who can find low-cost, high-quality stocks. Barron’s found a few international value funds, each targeting different countries and industries, that have a strong track record and performance this year. All have returned 9% to 11% annually for the past five years and are among the highest deciles among peers.
Russia is a particularly tricky area to navigate given its political and economic risks, but Alissa Corcoran, research director for the $460 million
fund (ticker: KGIIX), says some companies there trade at a much bigger discount than they earn. The fund has a quarter of its portfolio in Russian stocks, mainly utilities and energy companies. Hydropower giant
(HYDR.Russia), for example, is trading at just eight times earnings, while U.S. utilities generally trade over 20 times. The fund also holds prospectors as a hedge against the economic cycle.
Wheaton Precious Metals
(PLZL.Russia) are all among the largest holdings.
Corcoran also likes many Japanese companies, which have been very conservative with their balance sheets. “They have built up cash positions, giving them the opportunity to raise dividends or buy back their own shares,” she says.
David Herro, $27 Billion Portfolio Manager
(OAKIX) has a different opinion. The fund has very few holdings in Japanese companies. Too much cash on a balance sheet can be a drag on a company’s return on equity, he says, since cash provides essentially zero returns. “We like financial strength and stability,” he adds, “but you don’t want too much of anything.”
Instead, Herro is very optimistic about European financial stocks. The group has been penalized for low and negative interest rates for much of the past decade, but it is well positioned to take off if European central banks start raising interest rates in the face of an overheated economy. “This should be a huge blow to the financial sector,” he says. Two-thirds of the fund’s portfolio is in continental European equities, with a further 16% in the UK.
Lloyds Banking Group
(ISP.Italy) are two of her top positions.
The $1.1 Billion
Pear Tree Polaris Foreign Value Small Cap
fund (QUSOX) has significant stakes in developed Asian markets such as Japan, South Korea and Taiwan, where high-quality small companies are found, said portfolio managers Sumanta Biswas and Bin Xiao. “We’re looking for steady, sustainable cash flows,” Xiao says.
Many Chinese companies also meet the fund’s valuation criteria, but co-managers have been very cautious about corporate governance risks. “We’ve seen a lot of accidents happen in China,” Biswas said. “The companies that are really good are already expensive.”
Write to Evie Liu at email@example.com