The AMG Pictet International Value Fund typically doesn’t follow its rivals into high-flying stocks, opting instead for deep research to uncover what often turn out to be “idiosyncratic” companies, said Ben Beneche, the fund’s co-portfolio manager.
Coverage of investing outside the U.S. usually is focused on emerging markets, especially China, as Alibaba BABA, -3.62% Tencent TCEHY, -3.23% and Baidu BIDU, -3.37% enjoy rapid growth as the government supports their virtual monopolies.
But you won’t find those names among the top holdings of the AMG Pictet International Value Fund APINX, -3.29% Beneche and co-managers Fabio Paolini and Swee-Kheng Lee favor companies including British medical-device maker LivaNova PLC LIVN, -1.41% Switzerland-based food company Nestle SA NESN, -1.04% and Japan Tobacco Inc. 2914, -2.09% Nine of the mutual fund’s top 10 holdings have posted gains over the past three years, the sole exception being Anheuser-Busch InBev SA ABI, -2.23%
“We do not think we have an edge in terms of predicting the cycle of future political events. We have an edge in playing the long-term game of buying attractive companies at attractive prices,” said Paolini, who heads AMG’s EAFE (Europe, Australia and Far East) strategy.
Read: This stock might be your best bargain investment in China’s growth
Beneche said the fund’s management team is being “extremely selective in order not to be caught by severe [price-to-earnings valuation] multiple contraction or earnings contraction.” Concern over inflated valuations is no doubt weighing heavily on U.S. investors weathering a sustained selloff for stocks.
One area Paolini believes has gotten frothy is semiconductors, which is backed up by this chart showing the five-year performance of the S&P 500 semiconductors subsector against the S&P 500 Index SPX, -4.10% :
It has been an incredible five-year ride for semiconductors, as investors expect the industry to stay on a rapid growth path because of the internet of things — the trend for consumer devices and home appliances to be connected to the internet.
But Paolini says many stocks in the industry are now overpriced.
“It is fair to say we are seeing signs of high margins and unsustainable levels of profitability in some elements of the semiconductor supply chain,” he said.
Still, the fund has some exposure to semiconductors, including ASML Holding N.V. ASML, -3.12% its ninth-largest position as of Dec. 31.
Three stock picks in Japan, South Korea and France
Beneche described Cocokara Fine Inc. 3098, -1.15% as “one of the long-term winners” as Japan’s pharmacy market consolidates. Unlike in the U.S., where two drugstore chains dominate the pharmacy space, the top 10 chain companies in Japan make up about 40% of the market.
Cocokara Fine “is the product of a six-way merger that continues to consolidate that market,” Beneche said.
He predicts cost savings from the merger will allow the company to earn “reasonable” returns. The shares trade for between 13 and 14 times what he believes the company’s “normal level of profitability” will be, which puts the valuation at about half the level of its competitors. That “normal” level of earnings power will be achieved within the next 12 to 24 months, he said.
While the fund is primarily invested in developed markets, it has up to 10% exposure in emerging markets, which include South Korea, because of the nature of corporate governance in the country, with families that have relatively little economic interest in companies controlling them through special classes of voting shares, Beneche explained.
South Korea’s Hyundai Mobis Co. 012330, -1.41% makes auto parts for Hyundai Motor Co. 005380, -0.94% HYMLF, -11.11%
Paolini said shares of Hyundai Mobis have been under pressure because of the troubled relationships between North and South Korea, as well as China, “where there is a huge amount of anti-Korea sentiment.” Hyundai Motor sales to China have fallen 40% over the past year, he said.
As a “captive business,” selling parts to Hyundai Motor, there is an “instant impact” to Hyundai Mobis when demand for vehicles declines, Paolini said. But over the long term, he expects the “highly predictable cash-generating business” to support considerably higher valuations for the shares.
Paolini cited French aircraft-engine maker Safran SA SAF, -1.78% SAFRY, -3.72% as an attractive long-term play. What Paolini likes about the business is not the initial sales, but the “fantastic visibility” of the revenue generated trough maintenance contracts that run for as long as 25 years.
Safran has a dominant position in the market for engines for narrow-body passenger jet planes, and Paolini sees no end to its order backlog or the flow of revenue and earnings gravy from overhauls and maintenance of engines.
Fund performance and holdings
The AMG Pictet International Value Fund was established in April 2014. It has $2.1 billion in assets and a five-star rating, the highest, from fund-research company Morningstar. Paolini has been in charge of Pictet’s EAFE strategy since 2003, and that strategy covers about $5 billion in assets.
Here’s how the fund’s Class N shares have performed compared with the fund’s benchmark, the MSCI EAFE Index:
| Total return - 2018 through Feb. 2 | Total return - 2017 | Avg. return - 3 years | |
| AMG Pictet International Fund - Class N | 2.2% | 27.1% | 12.0% |
| MSCI EAFE Index (U.S. dollars) | 3.6% | 25.6% | 9.2% |
| Morningstar Foreign Large Blend category | 3.1% | 25.1% | 8.3% |
| Sources: Morningstar, FactSet | |||
Here are the fund’s 10 largest equity positions (of 70) as of Dec. 31:
| Company | Ticker | Country | Share of portfolio | Total return - 2018 through Feb. 2 | Total return - 2017 | Total return - 3 years |
| Anheuser-Busch InBev SA | ABI, -2.23% | Belgium | 3.3% | -4% | -5% | -11% |
| Royal Dutch Shell PLC | RDSA, -2.06% | Netherlands | 3.0% | -2% | 14% | 22% |
| Japan Tobacco Inc. | 2914, -2.09% | Japan | 2.7% | 0% | -2% | 24% |
| CK Hutchison Holdings Inc. | 0001, -2.69% | China | 2.5% | 7% | 15% | 32% |
| LivaNova PLC | LIVN, -1.41% | United Kingdom | 2.5% | 7% | 78% | 54% |
| Nestle SA | NESN, -1.04% | Switzerland | 2.4% | -5% | 18% | 22% |
| J.D.com Inc. ADR | JD, -3.11% | China | 2.4% | 11% | 63% | 81% |
| GlaxoSmithKline PLC | GSK, -2.19% | United Kingdom | 2.3% | -1% | -11% | 7% |
| ASML Holding NV | ASML, -3.12% | Netherlands | 2.3% | 9% | 37% | 79% |
| Safran SA | SAF, -1.78% | France | 2.3% | 1% | 27% | 55% |
| Sources: AMG Funds, Morningstar, FactSet | ||||||
You can click on the tickers for more information on each company, including its business profile, news, price ratios and charts.
The managers of the fund tend to buy shares in local exchanges, but several of the companies are also listed on U.S. exchanges or have American depositary receipts (ADRs). Those include Anheuser-Busch InBev SA BUD, -4.29% Royal Dutch Shell PLC RDS.A, -4.10% Japan Tobacco Inc JAPAF, -0.91% CK Hutchison Holdings Ltd. CKHUF, -2.47% Nestle SA NSRGY, -3.03% ASML Holding NV ASML, -4.06% and Safran SA SAFRY, -3.72%