(PUB) Investing 2016

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Foreign Large-Value Funds Hope to Rebound Tracking Morningstar Analyst Ratings | Greg Carlson

David Herro has led Gold-rated Oakmark International OAKIX since its 1992 inception, and although veteran comanager Rob Taylor retired on Sept. 30 , its prospects remain bright. A hefty weighting in Euro- pean banks (the fund’s overall financials stake nearly doubles the 17 . 7% foreign large-blend norm) has hurt performance during the past three years, but Herro has continued to demonstrate conviction in most of his picks. It has slumped before only to rebound sharply, as its stellar long-term record demonstrates. Like the Causeway and Oakmark funds, Dodge & Cox International DODFX is a Gold-rated foreign large- blend fund that has lately landed in the value column. However, other than a dreadful 2015 campaign that owed primarily to a large stake in emerging markets (which were clobbered), the fund has held up quite well. It’s owned some of the traditional value fare that has dinged its peers, such as automakers BMW BMW and Honda and European banks Barclays BARC and Credit Suisse CSGN . But those losses have been offset in 2016 by the tailwind from a sizable weighting in tech. The fund’s long-term record is superb, and its low costs and deep management team continue to warrant a Gold rating. Bronze-rated Vanguard International Value VTRIX spreads its assets across three value-oriented subadvi- sors. That broad diversification means it’s rarely at the top or bottom of the foreign large-value category. An above-average weighting in emerging markets dented returns in 2015 , but the fund has otherwise held up pretty well in a tough environment for value investing. Low costs have led to fine long-term returns. Tweedy, Browne Global Value ’s TBGVX policy of hedging back to the dollar means its performance can vary widely from its peer group. That’s been a huge tailwind lately. However, the fund has substantially lagged its benchmark, the MSCI EAFE 100% Hedged Index, as the fund has made a contrarian move away from high-quality fare and into arguably cheaper areas such as banks and insurance companies. But the fund has still trounced that index over the long haul, and a veteran team and proven approach earn the fund a Silver rating. K Contact Greg Carlson at greg.carlson@morningstar.com

When a bull market runs for as long as this one has, it becomes especially prudent to look closely at what’s been out of favor in the hopes that you can find some- thing with still decent return potential. The foreign large-value Morningstar Category certainly fits the bill. Of Morningstar’s 15 categories of diversified all-equity funds, this one was the worst performer during the trailing five years through September, gaining just 6 . 3% annualized. Compare that with the 10 . 7% gain of foreign small/mid-growth funds, and the 13 . 9% -plus gains of all nine U.S. categories. There aren’t many foreign large-value Morningstar Medalists in the Morningstar 500 , as the Morningstar Style Box has skewed a bit toward growth, particularly among foreign funds. So we’ll include some value-oriented funds in the foreign large-blend category—which happens to be the second-worst performer among the 15 categories. Moving to value has led to poor recent performance for those blend funds, but their managers are generally proved right if early. I’ll go from left to right in the style box based on the funds’ current positioning. Causeway International Value CIVVX , which earns a Morningstar Analyst Rating of Gold, has struggled of late along with most value funds. (Although this fund is in the foreign large-blend category, its recent portfolios have been in the value column.) The managers have gone to the cheapest parts of the market, leading to above-average stakes in energy, materials, telecom, and banks that hurt the fund badly in 2014 and 2015 . And while the former two sectors have rebounded this year, the fund has still been hurt by other picks, including three Japanese stocks: East Japan Railway , Hitachi , and Sumitomo Mitsui Financial . Performance is still strong during the past five and 10 years, however, and the three lead managers have been at the helm since the fund’s late- 2001 inception.

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Our ratings are chosen for long- term success. Analysts assess a fund’s competitive advantages by analyzing people, process, parent, performance, and price. They do rigorous analysis and then submit their ratings to a committee that vets their work for thoroughness and consistency.