Currency Hedges Serve FMI International Well
This fund may lag when foreign stocks are on a tear, but it holds steady when they slide.
It’s been a rough half-decade for international stocks. Over the past five years, the MSCI EAFE index, a proxy for stocks in developed foreign countries, has returned an annualized 2.1%. That return reflects stock returns as well as currency movements—specifically, a rising dollar that has sapped the returns of U.S. investors in foreign firms. (A stronger dollar means that overseas earnings translate into fewer greenbacks here.) Account for those currency swings (funds typically try to hedge them by trading derivatives), and the index’s return jumps to 6.6%.
FMI International (FMIJX, which employs a currency hedge, has therefore trounced the unhedged EAFE in recent years. But the fund, classified as a mix of growth and value stocks, also has an excellent track record against the hedged version of the benchmark. Since International’s 2011 inception, its 8.3% annualized return beats the MSCI EAFE 100% Hedged index by more than a percentage point per year, with 23% less volatility.
The managers favor firms with competitive advantages in their industries; experienced, shareholder-friendly management teams; little debt; and robust returns on invested capital (a measure of profitability). Preferring to take deep dives into companies’ finances, the managers avoid firms that may not adhere to strict financial disclosure or accounting practices. To be considered, a stock must trade at a discount relative to its own price history as well as to its peers. Plus, the managers must be convinced that the discount is due to a temporary problem that the firm can overcome.
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Safran, the French maker of jet engines, is an example of such a firm. FMI added the stock to the portfolio in early 2018, after Safran acquired aerospace firm Zodiac. Trepidation about the deal had unfairly deflated Safran’s stock price, as had investor concerns over narrowing profit margins, says FMI research director Jonathan Bloom. Safran has returned nearly 31% since the fund purchased it.
FMI International lags when foreign stocks are going gangbusters but makes up ground when stocks slide. In 2011, when the MSCI 100% Hedged index surrendered 12.1%, the fund lost only 1.8%.
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