Our search for a foreign fund with a value tilt to replace Oakmark International (OAKIX) in the Kiplinger 25, the list of our favorite no-load mutual funds, has been difficult. Part of the reason: Bargain-priced foreign stocks have lagged their growth-oriented counterparts for seven of the past 11 calendar years, as well as so far in 2020. All told, the typical large-company foreign-value fund has logged a negative 2.8% annualized return over the past three years.
In the end, we didn't abandon value-style investing, but we found a fund that can soften the sting of lagging returns for this investing style.
Janus Henderson Global Equity Income (HFQTX, $6.01) invests in dividend-paying stocks, which has helped it hold up better than its foreign-value peers in rough-and-tumble times.
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The fund aims "to provide a consistently high level of income while investing in overseas markets with a value bias," says Ben Lofthouse, one of HFQTX's three comanagers. "We look for the dividend to be sustainable."
To that end, firms with strong balance sheets, steady profits and cash flow are ideal for the fund.
"Profitable companies have downside protection when things don't go as well," Lofthouse says.
A chunk of HFQTX is in utilities, which is a traditional value sector, but the draw – renewable energy – is decidedly 21st century. British American Tobacco (BTI), German utilities firm RWE (RWEOY) and U.K. telecom Vodafone Group (VOD) are the fund's top holdings.
Valuation matters, of course. But in recent years, the managers have put aside some value measures, such as share price in relation to book value (assets minus liabilities), in favor of other gauges, such as the price-to-cash-flow ratio, that they say are better predictors of future returns.
The managers are wary, too, of relying on mean reversion – the theory that a cheap stock will eventually rebound to its historical average valuation. Disruption in many industries means "past profitability may be peak profitability," Lofthouse says. "Looking forward as value investors has become very important."
Relative to other large-company foreign-value stock funds, Global Equity Income shines. Over the past three years, HFQTX ranks among the top 25% of its peers, albeit with a negative 2.0% annualized return. It currently yields 7.9% based on its trailing 12 months of payouts, a common measure for equity funds.
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