The performance of the BMO International Value strategy during the tumultuous markets of the past year is indicative of the power of the “value” investment approach. For the year to date (As of December 28, 2022) the Neutral rated, 4-star BMO International Value F showed a relatively small loss of 1.64%, a far better performance than the 10.62% average loss suffered by Morningstar International Equity category.
Longer term, the fund showed a five-year average annual compounded return of 3.6%, again better than the 2.28% earned by the category (as of December 28, 2022).
A Fund for Non-American Exposure
The $152 million fund, sub-advised by U.K.-based investment firm Pyrford International Ltd., has no exposure to U.S. or Canadian stocks, and provides Canadian investors with non-North American international exposure. Its biggest geographic weightings are in the U.K., Germany, Switzerland, France, Japan and Australia, with some exposure to Southeast Asia including Indonesia, Malaysia and Taiwan.
“Our performance held up well through the correction of 2022,” says Luke Casey, London-based product specialist at Pyrford. “Markets came off due to the tightening in financial conditions, but our style has been leading the market back.”
Dividends Are Important for These Managers
The fund is overseen by portfolio managers Tony Cousins, Daniel McDonagh and Paul Simons. Casey describes the team’s style as “defensive,” concentrating on companies with reliable earnings and dividend payments. Holdings also have low debt and therefore less vulnerability to rising interest rates.
“The level of leverage was not as important to investors when interest rates were lower, but we have always focused on companies with relatively low debt,” Casey says. “We also look for income support up front from dividends.”
The team seeks companies likely to achieve good earnings growth during the next five years, and therefore able to deliver attractive compound growth and rising dividends over time.
For example, the fund is overweight in telecom companies, a position the team began building steadily a couple of years ago when stock markets were buoyant and popular growth-oriented companies such as the tech giants were dominating the charts.
“The telecoms were overlooked and inexpensive at that time, and although these positions didn’t help that much throughout 2021 when markets were on a tear, this year the telecoms played a role in helping the fund outperform,” Casey says. “We weren’t rewarded straight away.”
Market Moves Slowly, Like a Glacier
Casey says the market sometimes moves “like a glacier” and there has been a slow acknowledgment that investors must be more discerning on price than they were during the boom markets of a couple of years ago when low interest rates were spurring interest in growth-oriented companies, even if they were already expensive.
“Value and quality are now being rewarded,” Casey says. “Interest rates will eventually level off, but we don’t know when. Rates aren’t going to be as low as previously, and expensive growth companies as well as low quality companies and speculative listings will not be as favoured.”
The fund is well diversified across 60 to 80 names, primarily medium to large capitalization firms, and holds no more than 5% of assets in any one company. It does not have exposure to all countries or sectors in its relevant benchmark index, and right now has nothing in real estate, for example. Currently, the largest sector exposures are in industrials and consumer staples.
This is a Time for Tactical Geographic Allocation
In addition to focusing on attractively valued companies with solid fundamentals, an important component of the team’s approach is tactical geographic allocation, and the top-down focus is on countries with the best economic growth prospects.
European countries such as Germany and Switzerland are more appealing than less stable economies like Portugal or Italy. An area of interest is Asia (ex-Japan), which is attractively valued and has good long-term growth prospects as the middle class expands.
“We look for labour force and productivity growth as an indicator of future corporate earnings growth,” says Casey.
Currency movements can sometimes boost fund performance, he says. Weakness in the Euro and the British pound, for example, could provide “currency tailwinds” for Canadian investors if these currencies regain strength relative to our dollar.
In the Pandemic Correction, the Fund Bought These International Stocks
World stock markets could suffer further corrections in 2023, particularly if earnings disappoint, Casey says, but the team at BMO International Value has a list of quality stocks it would buy if prices slip further, while taking profits in fully valued companies. Typically, this practice results in the fund having less downside in bad times than the market as a whole, Casey says.
When stocks plunged during the pandemic, the team built positions companies likely to withstand economic difficulties, such as Bank Rakyat Indonesia as well as Telkom Indonesia, both dominant operators in their respective industries.
More recently there has been a focus on companies with the ability to pass price increases on to consumers in inflationary times. Such holdings include Swiss-based food and drink multinational Nestle SA, Tokyo-based cigarette maker Japan Tobacco Inc. and Reckitt Benckiser Group PLC, a British multinational consumer goods giant specializing in health, hygiene and nutrition products.
The team at BMO International Value has taken advantage of price weakness to reinstate a position in Singapore-based ASM Pacific Technology Ltd., which makes equipment for various steps in the assembly and production of semiconductors. Shares had previously been sold at higher prices.
The fund holds a handful of high quality, low cost energy producers that are not dependent on high commodity prices to remain profitable. Holdings in the energy sector include British-based multinational firms BP PLC and Shell PLC, as well as Australian-based Woodside Energy Group Ltd.
Other holdings include German-based Nemetschek Group, a vendor of software for architects, engineers and the construction industry that has captured market share in a fragmented industry, and Brambles Ltd., an Australia-based firm providing supply chain logistical services and moving equipment such as pallets, crates and containers.
