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A Tortoise That Finishes First

Steven Goldberg

SSgA International Stock Selection may never lead the pack. But its steady approach has added up to superior long-term results.



Craig Scholl, manager of SSgA International Stock Selection fund (symbol SSAIX) is as cautious as they come. He and his team hardly deviate from the MSCI Europe, Australasia and Far East Index, the most popular foreign stock benchmark. Yet they have beaten the index every full year since Scholl took over in mid 2000. That kind of consistency suggests that this is a fund you might want to consider owning.

Scholl's slow-and-steady approach is a winner. The fund lagged the index in 2000, but Scholl wasn't on board the full year. Since then, it has never beaten the index by more than 4.3 percentage points, and once bested the index by less than one percentage point. "Our goal is to be consistent in outperforming the EAFE index," Scholl says.

The fund's five-year annualized total return through October 31 is 17%. That beats the index by 2.5 percentage points per year. It also puts the fund in the top 10% among broad-based foreign stock funds.

Because it hugs the EAFE index, this fund is essentially an enhanced index fund -- that is, it seeks to beat the index by a little bit every year by differing only slightly from the index. There are plenty of enhanced index funds; the problem is that many of them don't accomplish their goal. Scholl usually won't exceed a country's weighting in EAFE by more than five percentage points, nor will he underweight a country by more than five percentage points compared with the index. He's even more conservative with industry bets. He generally won't exceed or underweight an industry's position in the index by more than two percentage points.

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So how does Scholl do so well? "It's a stock-picking fund. We're looking for the best stocks in the world." Not surprisingly given Scholl's aversion to risk, the fund owns 100 stocks or more. "We're not about picking ten great stocks."

One note of caution: This fund will rise and fall largely with the EAFE index. It's every bit as volatile as EAFE. So if global stock markets tank, expect this fund to do badly, too.

The fund draws on overseas analysts, and Scholl, himself, travels overseas. But the fund's main tools are quantitative. Scholl and colleagues program high-powered computers to look for the best stocks available. Then, the managers review the data. The staff is deep. In addition to Scholl, the fund employs five people in Boston, and SSgA analysts around the world also contribute.

What does Scholl look for? Companies with strong balance sheets and improving earnings, and stocks with relatively high yields that are cheap relative to earnings, cash flow and book value. Scholl says he and his team use measures that others utilize, but that most professionals tend to underuse these tools. Chief among the measures are earnings surprises and analyst increases in earnings estimates.

The fund will buy both growth and value stocks -- but not stocks at the extremes. "We avoid deep value with no growth, and we avoid hyper-growth, high P/E stocks."

The fund's turnover is about 65% annually, and expenses are reasonable at 1%. It's purely a developed-market fund. If you want to add emerging markets, you'll have to buy an additional fund. Assets in the fund are $1.2 billion. Similarly managed private accounts hold more than $7 billion. Total firm assets aren't too high for a fund that specializes in large stocks.

Scholl is currently bullish on Europe. His biggest current overweight is in French banks. Most of them do business elsewhere, but are "undervalued just because they're in France." He also likes Denmark and Germany. "The Eurozone is growing at its fastest rate since 2000. A lot of that is from domestic sales, and we think that growth should keep up." As far as industries, he's especially bullish on media stocks and raw materials stocks.

Among his favorite stocks are a number of issues with American Depositary Receipts (ADRs). They include AstraZeneca PLC (AZN), the British drug company, which has an improving earnings outlook; Banco Bilbao Vizcaya Argentaria (BBV), a Spanish bank whose earnings are rising; British Airways (BAB), which has an estimated P/E for the coming 12 months of less than 11; Honda (HMC) with a modest P/E ratio of 13 and an improving earnings outlook.

This is a first-rate fund. I don't think it's as good as Dodge Cox International Stock (DODFX), which has returned an annualized 22% over the past five years. But the Dodge Cox fund will be streakier and does invest in emerging markets. As Scholl puts it: "We're a great fit for investors who don't have strong stomachs."

Steven T. Goldberg is an investment adviser and freelance writer.



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