Thomas White International Fund

Last week we spoke with Douglas Jackman CFA, an Executive Vice President at Thomas White, about the Thomas White International Fund (TWWDX). Thomas White started his eponymous firm in 1992 when he left Morgan Stanley. His initial investors were Sir John Templeton and John Galbraith, partners in the extremely successful Templeton Galbraith investment firm and pioneers in international investing. The firm manages mostly international assets.

The fund remains fully invested throughout market cycles. Its twin objectives are outperforming its benchmark (MSCI All-Country ex US) with lower volatility. A key way it achieves those twin objectives is by attempting to preserve capital during declining markets. They have been successful at this, outperforming in 19 out of 24 down quarters (79% of the time).

Thomas White’s proprietary research has broken down the its roughly 2,000 international stock universe (it only buys stocks with a market capitalization great than $1 billion) into 97 distinct regional industries (European banks, Japanese autos, for example). The key factors in this breakdown are that Thomas White believes that it has identified the most important valuation metrics in each of these 97 industry groups and the firm also believes that local market factors have a bigger impact on the stocks than global factors. Given the firm’s valuation-driven investment style, it ranks the companies in their respective industry groups to determine the most undervalued in each. After they have that ranking, the analysts at Thomas White then group all the stocks into deciles based on their expected returns. The most compelling 200-300 names are subject to additional qualitative analysis focusing on the quality of their accounting, management and products. From this group, the fund will select the most attractive 100 to 150 names for its portfolio (currently 141 names).

To manage risk, the fund monitors the valuations of each stock in its universe every month, has individual position size limits and also limits as to how far it will allow the fund to deviate from the index.

The fund does not hedge its currency exposure. While allowed to by prospectus, it never has hedged. The firm pointed out to us that its benchmark, the MSCI all-Country ex US contains both Emerging Markets and Canada unlike the more usual MSCI EAFE index.

Mr Jackman commented that the managers are concerned about the effects on the global economy as the massive amount of excess government liquidity is unwound. The fund has been cutting back its exposure to health care and retail. The managers also have 24% of the fund’s assets in emerging markets, its highest level ever.

The Thomas White International Fund’s uses more quantitative tools and owns more stocks than other funds we typically use. Importantly, they apply their approach in a consistent and disciplined manner with results that are impressive. They are good stewards of their fund holder’s capital. We continue to like this fund as a way for ourselves and our clients to get broad exposure to all international stocks whether in developed or emerging markets. We also think the fund’s focus on volatility reduction and relative valuation make this fund a core holding for many investors.

Disclosure: Harvest Financial Partner owns the Thomas White International Fund in its client portfolios. The authors own the Thomas White International Fund. Positions can change at any time.
Posted by Harvest Financial Partners at 1:52 PM