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These International Stalwarts Are Better Than They Look Right Now

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William Samuel Rocco (bill.rocco@morningstar.com)
·3 min read
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The investment environment for international-stock funds has changed markedly for the worse in 2020, just as it has for domestic-equity offerings. Indeed, after posting solid gains over the final 9.5 months of 2019, most overseas stock markets gyrated down sharply during the first two and a half months of this year. Consequently, the average funds in all of the international-stock Morningstar Categories were in the red for the 12 months through March 13.

Meanwhile, as normally is the case in tumultuous market conditions as well as in steady market environments, there were several prominent and generally successful international funds that markedly underperformed, including Harding Loevner International Equity HLMNX and Oakmark International OAKIX. These two funds, which were slowed by stylistic headwinds as well as by weak holdings, remain good options for investors who have long time horizons and understand the risks of their processes.

Harding Loevner International Equity
This fund, which has a Morningstar Analyst Rating of Silver, lost 9.7% during the past 12 months through March 13, 2020, while its average rival in the foreign large-growth category declined 6.9%, and the MSCI ACWI ex USA Growth Index fell 8.8%. Several of co-lead managers Ferrill Roll and Andrew West's stock picks sank, including top-15 holdings Allianz (an insurer and asset manager based in Germany), Check Point Software Technologies CHKP (an IT-security company headquartered in Israel), and Baidu BIDU (an Internet search and services provider based in China).

But a key component of this fund's strategy was also out of favor during the past year. Roll and West employ a fairly moderate, quality-driven growth process, so this fund has more exposure to value and core stocks than both its average peer and the MSCI ACWI Growth Index, and such names lagged well behind growth issues. (The MSCI ACWI ex USA Value Index and MSCI ACWI ex USA Index lost roughly 24.6% and 16.8% over the past 12 months.)

While the managers have delivered inferior results with their quality-growth discipline during the past year, they've earned strong returns in all sorts of conditions in the past, and this fund has a good long-term record. Therefore, it is still a good growth-oriented foreign-stock vehicle for the long haul.

Oakmark International
This Gold-rated foreign large-blend fund plummeted 24.0% during the 12 months through March 13, which was roughly 8.7 percentage points worse than the average member of its category and 7.2 percentage points worse than MSCI ACWI ex USA Index. Lead manager David Herro's stock selection was a real problem, as several major holdings suffered enormous losses, including top-five names Glencore (a commodity conglomerate headquartered in Switzerland) and Continental (an automotive manufacturing firm based in Germany), which fell more than 50% each during the period.

But this fund also faced two strategic headwinds. First, Herro is a hard-core contrarian who readily invests after terrible corporate, industry, or macroeconomic developments and who regularly adds to holdings on weakness. (He bought more Glencore and Continental during the second, third, and fourth quarters of 2019 as they trended down.) Second, Herro's process is more value-oriented than those of most foreign large-blend skippers; this fund's portfolio currently and frequently lands in the large-value section of the Morningstar Style Box, and value stocks have lagged over the past year. (The MSCI ACWI ex USA Value Index lost nearly 8 percentage points more than the MSCI ACWI ex USA and nearly 16 percentage points more than the MSCI ACWI Growth Index during the past year.)

Herro's high-conviction, contrarian value strategy has also hurt performance in the past, and it will likely do so again in the future. But this approach has succeeded much more than it has stumbled, and this fund has a strong long-term record. Thus, Oakmark International remains a good source of foreign-large-cap exposure for investors with long time horizons and high tolerances for rough spells.