Seeking value primarily in the non-US developed markets

The International Value Select portfolio is constructed from an equity universe composed of companies with market capitalizations typically greater than $5 billion located in non-US developed and emerging market countries. The strategy uses our international value equity strategy with two distinctions: the select portfolio has greater liquidity (by way of investing in larger capitalization companies) and fewer holdings. We believe that concentrating the holdings can compensate for the loss of small/mid cap exposure. The investment process comprises three stages: quantitative screening and initial analysis, fundamental research, and portfolio construction.

Strategy overview

The portfolio managers discuss our International Value Select strategy.

Portfolio managers

Chief Executive Officer
Fundamental Portfolio Manager
President
Head of Fundamental Research
Fundamental Portfolio Manager
Fundamental Portfolio Manager
Fundamental Portfolio Manager
Fundamental Portfolio Manager
Fundamental Portfolio Manager
Fundamental Portfolio Manager

Performance

QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) 2.0%-15.6%-5.8%-3.7%3.0%4.9%5.0%
Strategy (net) 1.9%-15.9%-6.1%-4.0%2.6%4.5%4.5%
MSCI EAFE 4.9%-6.7%0.9%1.1%5.8%5.1%4.7%
QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) 2.0%-15.6%-5.8%-3.7%3.0%4.9%5.0%
Strategy (net) 1.9%-15.9%-6.1%-4.0%2.6%4.5%4.5%
MSCI EAFE 4.9%-6.7%0.9%1.1%5.8%5.1%4.7%
QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) 2.0%-15.6%-5.8%-3.7%3.0%4.9%5.0%
Strategy (net) 1.9%-15.9%-6.1%-4.0%2.6%4.5%4.5%
MSCI EAFE 4.9%-6.7%0.9%1.1%5.8%5.1%4.7%
QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) 2.0%-15.6%-5.8%-3.7%3.0%4.9%5.0%
Strategy (net) 1.9%-15.9%-6.1%-4.0%2.6%4.5%4.5%
MSCI EAFE 4.9%-6.7%0.9%1.1%5.8%5.1%4.7%
Fund 20192018201720162015201420132012201120102009
Strategy (gross) 21.2%-17.2%29.5%1.5%-1.3%-4.3%27.2%24.7%-9.6%13.2%35.4%
Strategy (net) 20.8%-17.5%29.1%1.1%-1.7%-4.7%26.8%24.3%-9.9%12.7%34.8%
MSCI EAFE 22.7%-13.4%25.6%1.5%-0.4%-4.5%23.3%17.9%-11.7%8.2%32.5%
Strategy (gross)
Strategy (net)
MSCI EAFE
20192018201720162015201420132012201120102009
21.2%-17.2%29.5%1.5%-1.3%-4.3%27.2%24.7%-9.6%13.2%35.4%
20.8%-17.5%29.1%1.1%-1.7%-4.7%26.8%24.3%-9.9%12.7%34.8%
22.7%-13.4%25.6%1.5%-0.4%-4.5%23.3%17.9%-11.7%8.2%32.5%

Portfolio (as of September 30, 2020)

Benchmark: MSCI EAFE
Asset Allocation
Strategy
Stocks 99.0%
Cash 1.0%
Strategy Characteristics
Strategy Benchmark
No. of holdings 61 902
Weighted avg. market cap (US $MM) $55,899 $54,610
FY2 price/earnings 11.7 15.4
Price/book value 1.1 1.6
Dividend yield (%) 3.0 2.7
TOP 10 HOLDINGS
Security Country Percent
Volkswagen AG Germany 4.4%
UniCredit S.p.A. Italy 3.6%
Samsung Electronics Co., Ltd. South Korea 3.4%
BASF SE Germany 3.3%
ING Groep NV Netherlands 3.1%
Takeda Pharmaceutical Co., Ltd. Japan 3.0%
Novartis AG Switzerland 3.0%
FANUC Corp. Japan 3.0%
ABB Ltd. Switzerland 2.8%
Infineon Technologies AG Germany 2.6%

A “weighted average” measures a characteristic by the market capitalization of each stock. Price/book ratio is the weighted average of the price/book ratios of all the stocks in a portfolio. The P/B ratio of a company is calculated by dividing the market price of its stock by the company’s per-share book value. The price/earnings ratio is the weighted average of the price/earnings ratios of the stocks in a portfolio. The FY2 P/E ratio is a forward P/E ratio using a next-twenty-four months EPS estimate in the denominator.

Holdings are subject to change.

SECTOR WEIGHTS
Sector Strategy Benchmark
Financials 23.6% 15.1%
Industrials 21.2% 15.2%
Information Technology 13.2% 8.6%
Health Care 11.0% 14.4%
Consumer Discretionary 9.7% 11.9%
Materials 7.7% 7.6%
Consumer Staples 6.0% 11.9%
Energy 2.6% 2.8%
Utilities 2.3% 4.0%
Communication Services 1.8% 5.5%
Real Estate 0.0% 3.1%
TOP 10 COUNTRIES
Country Strategy Benchmark
Germany 19.1% 9.6%
United Kingdom 14.6% 13.3%
France 14.4% 10.7%
Switzerland 11.2% 10.4%
Japan 10.5% 25.8%
Spain 6.2% 2.2%
Netherlands 6.1% 4.4%
Italy 5.2% 2.2%
South Korea 4.7% 0.0%
China 2.3% 0.0%
Regional Allocation
  • Europe – other 80.0%
  • Pacific 11.2%
  • Emerging Asia 7.0%
  • Emerging Latin America 0.7%

Commentary (As of September 30, 2020)

Highlights

  • Equities declined in September—the first month of negative returns since the market shock in March at the onset of the coronavirus pandemic. Value stocks underperformed growth stocks.
  • Until a vaccine, therapies, and widespread testing are available and economies fully reopen, we believe further stimulus packages will be needed to bolster the recovery in most regions.
  • In our view, the most compelling companies in the value universe are those engaged in operational restructuring, using the disruption of the pandemic to lean out their cost bases and shed non-core assets. This ensuing boost in operating leverage may position these forward-thinkers well for an upturn in revenues as recovery develops.

Portfolio attribution

The Portfolio underperformed the Index during the month, due primarily to stock selection. Portfolio holdings in the capital goods, transportation, and pharmaceuticals & biotechnology industry groups, along with an overweight position in the banks industry group and an underweight position in the health care equipment & services industry group, detracted from performance relative to the Index. Holdings in the technology hardware & equipment, food beverage & tobacco, and materials industry groups, as well as an overweight position in the semiconductors & semi equipment industry group and an underweight position in the diversified financials industry group, offset some of the underperformance versus the Index. The largest detractor was jet engine manufacturer, Rolls-Royce Holdings Plc (United Kingdom). Additional notable detractors included four banking & financial services companies: UniCredit S.p.A. (Italy), BNP Paribas SA (France), Barclays Plc (United Kingdom), and ING Groep NV (Netherlands). The top contributor to return was electronic equipment manufacturer, Samsung Electronics Co., Ltd. (South Korea). Other notable contributors included robotics manufacturer, FANUC Corp. (Japan), electronic components manufacturer, Murata Manufacturing Co. Ltd. (Japan), British American Tobacco plc (United Kingdom), and semiconductor company, Infineon Technologies AG (Germany).

Investment outlook

This year’s dominance of growth and momentum stocks over value stocks has surpassed the peak reached during the technology, media, and telecommunications (“TMT”) bubble in the early 2000s. The biggest winners in this bifurcated market are companies exhibiting top-line growth, regardless of whether this translates to near-term profitability. The trends of passive investing and algorithmic trading have exacerbated a concentration of performance—the bulk of equity returns in a number of region-based indices during the year-to-date period derive from just five companies, with the effect most pronounced in the US and emerging markets. Growth stock valuations are so stretched relative to history that we believe any abatement of pandemic-related uncertainty—namely efficacious vaccines or therapies that facilitate economic reopening—could spark a shift in investor sentiment towards economically cyclical companies. We believe that the cyclical component of value should also benefit from further fiscal spending by Western governments in infrastructure. In our view, the most compelling companies in the value universe are those engaged in operational restructuring, using the disruption of the pandemic to lean out their cost bases and shed non-core assets. This ensuing boost in operating leverage may position these forward-thinkers well for an upturn in revenues as recovery develops. We continue to engage with portfolio company management teams to hold them accountable to meet their earnings and cash flow goals. For example, in a lower-for-longer interest rate environment, we expect certain bank stock managements to grow fee-based and trading-based franchises that are not reliant on a rise in rates. While much of our fundamental research is dominated by cyclical stocks, we also seek opportunities in defensive sectors that have also been impacted by the coronavirus lockdowns. The considerable undervaluation in stocks across a range of industries has led us to experience far more investment opportunities than we have capital to deploy. We believe that, by mid-2021, the earnings, cash flow, and dividend prognosis for many of these undervalued stocks should improve demonstrably. Markets anticipate events well in advance. In our view, this should translate into better performance, perhaps amplified by valuation multiple upgrades as confidence in these companies rises post-pandemic.

The market commentary expresses the portfolio managers’ views as of the date of this report and should not be relied on as research or investment advice regarding any stock. These views and the portfolio holdings and characteristics are subject to change. There is no guarantee that any forecasts made will come to pass. The securities identified and described above do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the securities identified was or will be profitable. Past performance does not guarantee future results. For a description of our performance attribution methodology, or to obtain a list showing every holding's contribution to the overall account's performance during the quarter, please contact our product manager, Kevin Moutes, at 310-231-6116 or [email protected].