A Fund That Wins With Contrarian Foreign Stock Picks

“We have time on our side, since we’re focused mainly on annual earnings and quarterly earnings trends,” he says. “Looking at it on a longer-term basis, you can really get some substantial variance in earnings expectations.”

Winkowski, 53, sums up his strategy neatly: Take a contrarian view toward bottom-up stock selection to create a concentrated portfolio of 60 to 80 names of large, industry-leading companies that trade at a substantial discount to intrinsic value, and hold them for at least two to four years. The fund’s returns show that sticking with this philosophy has paid off.

International Leaders beats its large, foreign blend peers on a 10-year basis with an annualized return of 4.7%, according to
Morningstar,
also besting the fund’s benchmark, the MSCI EAFE Index. It has a front load of 5.5%, and Morningstar notes the fund’s 1.1% annual expense ratio is considered below average.

The New York City–based Winkowski, co-manager Dariusz Czoch, and their team of nine analysts—who average 17 years of experience—seek to buy stocks that are trading sharply below the team’s intrinsic value estimate, looking for discounts of 60% or more. They used to pencil out a three-to-five-year holding period, but recent market volatility has cut that time frame to two to four years.

“[Prices] move pretty violently when they start to work,” he says.

Defining intrinsic value depends on the sector. In consumer staples, for example, price-to-earnings ratios and cash flow are key, while in technology, relative valuation to history and peers gets more weight.

The team starts its research with a front-end screen to flag potential candidates; then the legwork commences. Each analyst conducts more than 250 company meetings annually, looking for strong management teams with good governance practices, and Winkowski’s team compares notes with the larger Federated Hermes equity and fixed-income staff to incorporate more input. Another unique aspect versus peers is the risk-management analysis that team member Chase Stewart, a quantitative analyst, conducts on holdings, which verifies that portfolio risks are intended and sized accordingly.

As a high-conviction, concentrated fund, managing position size matters, whether it’s adding a new name or pruning holdings. Winkowski has a laundry list of possible candidates to buy if prices look attractive, and will establish a small toehold at first. The team often reviews holdings to re-evaluate growth and goals, selling those that are fully valued or lifting price targets if growth persists.

Rolls-Royce
(RR.UK), a top providerand servicer of large aircraft engines, exemplifies this process. The fund established a 1% portfolio-weight position in December 2022. The stock was pummeled by travel curbs during Covid. New management took over in January, focused on profitability and cash flow, and, liking what he saw, Winkowski eventually doubled the fund’s position. The stock is up 120% from that first buy, and Winkowski thinks it still has 50% to 60% upside.

Covid’s market impact offered Winkowski a rare chance to bank on a theme—that leisure and business travel would rebound to 2019 levels this year. Those picks have powered year-to-date and one-year performance. In addition to Rolls-Royce, International Leaders bought British-based
Informa
(INF.UK), one of the largest global trade-show and events operators, in March 2021. In September 2021, it bought another United Kingdom firm,
SSP Group
(SSPG.UK), a leading food-service operator in travel locations such as airports and train stations.

Since March 2021,
Informa
has risen about 23%. Winkowski thinks the stock has about 25% upside left. SSP Group has been tarnished by concerns about U.K. consumption, despite only having 20% of its business there. Winkowski believes it may see 50% upside.

The International Leaders fund performs best when bottom-up fundamentals matter. Top-down macro dislocations offer buying opportunities, but sometimes particularly heavy doses of negative macroeconomic news weighs on annual returns, such as in 2018. That was a tough year for equities generally, and International Leaders sharply lagged behind peers, hurt by its overweight to European financials when those bank stocks suffered their worst year since 2008. In response, the fund became more diversified across sectors, which has helped returns.

International Leaders’ biggest county exposures are to the U.K. and France, but Japan now has the third-largest weighting. Winkowski is excited about Japan because, for the first time in decades, the country is starting to see growth, with both inflation and wages increasing. He made a small dip into Japanese banks in the second quarter of 2022, including
Sumitomo Mitsui Financial Group
(8316.Japan), and in April he bought
Mitsubishi Heavy Industries
(7011.Japan), which builds aerospace parts and also has an aftermarket-parts business.

Mitsubishi
will benefit from Japan’s intent to increase defense spending to 2% of gross domestic product by 2027, Winkowski says. Japanese banks may benefit when rates start to creep higher as the
Bank of Japan
adjusts its yield-curve control, provided the central bank manages the adjustment in rates well.

Even with the recent market weakness in the U.S. and Europe this summer, he’s positive on the rest of the year, believing the interest-rate-hiking cycles are nearly done in both places. And he’s seeing value in his own fund.

“I’ve been buying up my own fund as of late. I’m pretty confident in the names and…the upside we have in our names,” Winkowski says.

Write to Debbie Carlson at [email protected]