In the complex world of international mutual funds, diversification is key, but not all funds are created equal. Some have a heavy leaning towards the U.S. technology stocks that have been the driving force behind the S&P 500’s impressive returns over the last decade. This can make comparisons between these funds and international stock indexes a slippery slope. With the S&P 500 being largely dominated by a select few companies such as Apple Inc., Microsoft Corp., Amazon.com Inc., Nvidia Corp., and Alphabet Inc., there’s an inherent concentration risk to big tech, putting the wisdom of tracking this index under scrutiny.
Nevertheless, the Tweedy, Browne International Value Fund TBGVX, with a focus on developed markets outside the U.S., offers an alternative. With U.S. investments comprising just 13.2% of its portfolio as of July 31, this fund offers a counterbalance to the tech-heavy S&P 500. Despite its annual expenses of 1.4% of assets being considered high by investment-information provider Morningstar, the fund has managed to secure a four-star rating within Morningstar’s Foreign Large Value category. This fund’s average annual returns have trailed the MSCI EAFE Index for five and ten years but have exceeded it for all other periods, hinting at the potential benefits of long-term investment in international equities.
International Mutual Funds: A Deeper Dive into Diversification and Performance
In the realm of international mutual funds, diversification varies. Some funds lean heavily on U.S. technology stocks, which have significantly influenced the S&P 500’s impressive returns over the past decade. This makes comparing their performance with international stock indexes somewhat challenging.
S&P 500: A Handful of Giants
The S&P 500, due to its market-capitalization weighting, is largely controlled by a small group of companies. Five titans, namely Apple Inc., Microsoft Corp., Amazon.com Inc., Nvidia Corp., and Alphabet Inc., command 24% of the SPDR S&P 500 ETF Trust, which tracks the U.S. benchmark index. While tracking the S&P 500 has proven beneficial for patient investors over the past decade, it does pose a concentration risk to big tech. And as history shows us, no sector stays on top forever.
Diversifying the Investment Approach
One way to domestically diversify would be to invest in a fund that adopts an equal-weighted approach to the S&P 500. Additionally, gaining exposure to non-U.S. companies, especially those with a value focus, can assist in diversifying away from soaring tech stocks.
A Closer Look at Tweedy, Browne International Value Fund
The $6.1 billion Tweedy, Browne International Value Fund (TBGVX) is one such fund that focuses on developed markets outside the U.S. With U.S. investments comprising only 13.2% of its portfolio as of July 31, it has a four-star rating within Morningstar’s Foreign Large Value category, despite its annual expenses of 1.4% of assets, considered high by the investment information provider.
The fund’s average annual returns have lagged those of its benchmark, the MSCI EAFE Index, for five and 10 years but have outperformed for all other periods shown. The fund was established in June 1993 by Tweedy, Browne Co., the successor to Tweedy & Co., founded by Forrest Berwind Tweedy in 1920.
The Investment Philosophy
In an interview, members of the firm’s investment-management committee explained their investment approach. They strive to buy companies at prices that are “70% or less of a conservative estimate of intrinsic value.” This process, akin to buying or selling a house, involves a careful appraisal process, taking into account qualitative factors for valuation multiples.
The team also places importance on insider buying patterns and maintaining a low turnover rate for the fund. They believe in "eating their own cooking," with $158 million of the fund managers’ own money, or that of family members of the firm’s employees or partners, invested in the fund.
While the S&P 500 has yielded significant returns, investors should consider the concentration risk that comes with an over-reliance on a handful of tech giants. Diversification, both domestically and internationally, can be a prudent approach to mitigating this risk. The Tweedy, Browne International Value Fund is one such example of a fund that has diversified its portfolio, focusing on intrinsic value and long-term returns. This approach might be a viable alternative for investors looking to reduce their exposure to the U.S. tech sector and broaden their investment horizons.