Foreign Stock Funds See Banner Year, But Investment Style Dictates Returns Amidst Thematic Shifts

Funds focused on international equities have experienced a remarkable year, yet the extent of their success has been notably contingent on the underlying investment philosophy employed. A significant divergence in performance has been observed across overseas markets, where value-priced shares have demonstrably outperformed their growth-oriented counterparts by a factor of two over the past twelve months. This pronounced disparity helps elucidate the recent trajectory of funds such as Fidelity International Growth (FIGFX), a distinguished member of the Kiplinger 25, a curated list of no-load mutual funds favored by investors. While FIGFX posted a respectable 12-month gain of 15%, aligning with its peer group of large foreign growth stock funds and its specific benchmark, the MSCI EAFE Growth Index, it conspicuously lagged the broader MSCI EAFE Index, which surged by an impressive 23% over the same period, underscoring the dominant trend favoring value internationally.

Understanding the Value-Growth Divide in Global Markets

The performance differential between value and growth investing styles is a recurring theme in financial markets, often oscillating in prominence depending on prevailing economic conditions and investor sentiment. Value investing, championed by figures like Benjamin Graham and Warren Buffett, focuses on acquiring stocks that appear to trade for less than their intrinsic value. These companies often exhibit lower price-to-earnings ratios, higher dividend yields, and robust balance sheets, appealing to investors seeking stability and potential long-term appreciation based on fundamental strength. Growth investing, conversely, targets companies expected to grow at an above-average rate compared to the market. These firms often reinvest heavily in their operations, have higher P/E ratios, and their valuations are predicated on future earnings potential rather than current profitability.

In the global context over the past year, several factors converged to create a fertile environment for value stocks. Rising interest rates in major economies, driven by persistent inflationary pressures, tend to diminish the present value of future earnings, thereby disproportionately impacting growth stocks whose valuations are more sensitive to discounted future cash flows. Geopolitical uncertainties, supply chain disruptions, and a renewed focus on tangible assets and established industries also played a role. Many international value stocks are concentrated in sectors like financials, industrials, and materials, which tend to benefit from economic recovery phases and higher commodity prices. Conversely, the exuberance around certain high-growth technology sectors, while still present, faced headwinds from higher capital costs and a more scrutinizing market environment for companies whose profitability might be years away. The MSCI EAFE Index, representing developed markets in Europe, Australasia, and the Far East, typically has a broader sector exposure than its growth-focused sub-indices, allowing it to capture the upside from this value rotation more effectively.

Fidelity International Growth (FIGFX): A Deeper Dive

Fidelity International Growth (FIGFX) is managed by Jed Weiss, who launched the fund in 2007. The fund’s inclusion in the Kiplinger 25 signifies its standing as a recommended no-load mutual fund, meaning investors can buy and sell shares without paying sales commissions, a significant advantage for long-term investors. As of its latest reporting, the fund manages assets in the range of several billion dollars, reflecting substantial investor confidence. Its investment objective is to achieve long-term capital growth by primarily investing in common stocks of foreign companies that the portfolio manager believes have above-average growth potential. The fund’s expense ratio, a critical metric for mutual fund investors, is competitive within its category, typically around 0.88% as of recent data, which is crucial for preserving returns over time.

Despite the broader market trend favoring value, FIGFX’s 15% return over the last 12 months demonstrates a resilient performance within its growth mandate. This performance is particularly noteworthy given that its specific benchmark, the MSCI EAFE Growth Index, which tracks large and mid-cap growth equities across developed markets outside North America, also saw a similar performance trajectory, indicating the fund effectively kept pace with its growth peers. However, the significant gap between FIGFX’s returns and the 23% surge of the broad MSCI EAFE Index highlights the powerful influence of macro-style factors, specifically the underperformance of the growth style compared to value in the international arena during this period.

Thematic Investments Fueling FIGFX’s Returns

Manager Jed Weiss attributes a substantial portion of the fund’s returns to astute theme-driven investments, demonstrating his proactive approach to identifying global trends. His strategy recognizes that innovation and economic expansion are not exclusive to the United States but are globally distributed.

Global Artificial Intelligence (AI) Infrastructure: One of the most impactful themes has been the burgeoning demand for Artificial Intelligence (AI) infrastructure. Weiss astutely identified that the global race for AI dominance extends far beyond Silicon Valley. A prime example of this successful thematic bet is Taiwan Semiconductor Manufacturing Company (TSMC) (TSM). As the world’s largest dedicated independent semiconductor foundry, TSMC is an indispensable pillar of the global technology ecosystem, particularly for advanced AI chips. The company’s stock price doubled over the past year, reflecting unprecedented demand for its cutting-edge fabrication services from leading AI developers and hardware manufacturers. TSMC’s critical role in producing the specialized processors required for AI applications, from machine learning to generative AI, positions it at the forefront of this technological revolution. The global AI market is projected to grow at a compound annual growth rate (CAGR) exceeding 35% in the coming years, reaching trillions of dollars by the end of the decade, making companies like TSMC pivotal beneficiaries.

Ramp-up in Global Defense Spending: Another significant tailwind for the fund’s performance has been the dramatic increase in global defense spending. Geopolitical tensions, particularly exacerbated by the ongoing conflict in Ukraine and heightened security concerns in the Indo-Pacific, have prompted nations worldwide to bolster their military capabilities. Europe and Japan, in particular, have initiated substantial increases in their defense budgets, reversing decades of relative stagnation. This shift has created a lucrative environment for defense contractors. BAE Systems (BAESY), a British multinational aerospace, arms, and security company, saw its stock price surge by a remarkable 62% in 2023. BAE Systems is a key supplier of advanced defense technologies, including combat aircraft, naval vessels, and cyber security solutions, making it a direct beneficiary of this global rearmament. While its stock has experienced some retreat since the start of 2024, the underlying trend of increased defense expenditure remains robust, with global military spending reaching record highs, surpassing $2.2 trillion in 2022 and continuing its upward trajectory.

Consolidation in the Cement Industry: Beyond high-tech and defense, Weiss also identified compelling opportunities in more traditional, yet dynamic, sectors. The global cement industry, often perceived as a mature sector, has been undergoing a significant consolidation phase. This trend is driven by several critical factors: increasingly stringent carbon emissions standards, higher energy costs, and the need for greater operational scale to invest in sustainable technologies. Smaller, less efficient companies have struggled to adapt to these new realities, leading to their acquisition or marginalization. Larger, more diversified cement firms, such as Switzerland-based Holcim (HCMLY), have capitalized on this trend. Holcim, a global leader in building materials, has seen its stock rise by 39% over the past 12 months. The company has strategically expanded its market share through acquisitions and by investing in greener technologies and sustainable building solutions, aligning with global environmental objectives while simultaneously enhancing its competitive advantage. The global cement market, valued at over $350 billion annually, is undergoing a transformation driven by sustainability and efficiency, favoring industry giants capable of meeting evolving regulatory and market demands.

Challenges and AI-Related Drags on Performance

Despite the successes, the fund also encountered specific headwinds, particularly related to the rapidly evolving AI landscape. Jed Weiss noted that not owning certain power companies and electrical components manufacturers, which are crucial AI infrastructure plays, negatively impacted the fund’s returns. The immense computational demands of AI models require significant power generation and advanced electrical grid infrastructure. Companies providing these foundational components, often less glamorous than chipmakers but equally vital, experienced substantial growth as data centers expanded and energy needs surged. The fund’s underweight position in these segments meant it missed out on some of these gains.

Furthermore, unexpected AI disruptions posed challenges to some of the fund’s holdings. Weiss specifically mentioned RELX (RELX), a UK-based information and analytics company that owns the legal database LexisNexis, and SAP (SAP), the German enterprise software giant. For RELX, the rapid advancements in generative AI and large language models (LLMs) present both opportunities and threats. While AI can enhance legal research and analytics, it also introduces the potential for new competitors or shifts in how legal professionals access and process information, potentially disrupting established business models. Similarly, SAP, a behemoth in enterprise resource planning (ERP) software, faces the dual challenge of integrating AI into its offerings while also fending off disruption from agile AI-native solutions that could redefine business processes. As of March, the fund had divested from both RELX and SAP, indicating a strategic reallocation of capital in response to these evolving market dynamics and perceived risks. This highlights the fluidity and rapid pace of change in the technology sector, where even established leaders can face sudden competitive pressures from emerging AI capabilities.

Jed Weiss’s Enduring Investment Philosophy and Long-Term Success

Jed Weiss’s investment philosophy is rooted in a disciplined approach that prioritizes identifying companies with a distinct niche within their industry and robust multiyear growth prospects. He emphasizes thorough fundamental analysis to uncover firms with sustainable competitive advantages, strong management teams, and clear pathways to future expansion. Crucially, price matters significantly in his selection process; he seeks out quality growth at a reasonable valuation, avoiding overhyped or excessively priced assets.

This judicious approach has yielded impressive long-term results. Since launching the Fidelity International Growth fund in 2007, Jed Weiss has delivered a 6% annualized return. This performance stands well ahead of the broad MSCI EAFE Index, which has generally seen lower annualized returns over the same period, and has also consistently outperformed its peer group of international growth funds. His tenure spans multiple market cycles, including the global financial crisis, periods of European sovereign debt crises, and the recent technological boom, demonstrating the resilience and effectiveness of his strategy across diverse economic environments. His ability to identify enduring themes and adapt to changing market conditions while maintaining a focus on fundamentally strong, well-priced companies has been a cornerstone of the fund’s consistent outperformance.

Broader Implications for International Investors

The recent performance of foreign stock funds, particularly the divergence between value and growth, carries several key implications for international investors.

Firstly, it underscores the importance of active management in navigating complex global markets. While passive indexing offers broad market exposure, an active manager like Jed Weiss can leverage thematic insights and fundamental analysis to identify specific opportunities and mitigate risks, potentially leading to outperformance within a given style or sector.

Secondly, the performance differential highlights the critical role of investment style allocation. Investors whose portfolios were heavily weighted towards international growth stocks may have experienced more modest returns compared to those with greater exposure to value-oriented foreign equities. This suggests the benefit of maintaining a diversified approach across different investment styles, or at least being aware of the cyclical nature of value and growth outperformance.

Thirdly, the success of thematic investments in areas like AI infrastructure, defense, and industrial consolidation demonstrates the potential for opportunistic investing beyond traditional sector classifications. Identifying powerful, long-term global trends can unlock significant value, even in seemingly disparate industries.

Finally, the challenges faced by certain holdings due to AI disruptions serve as a reminder of the dynamic and unpredictable nature of technological change. Companies that fail to adapt or integrate new technologies risk being outmaneuvered. Investors must continuously assess the competitive landscape and technological relevance of their holdings, particularly in fast-evolving sectors.

In conclusion, the past year has been a period of significant gains for foreign stock funds, but the nuances of investment style have been paramount. Funds like Fidelity International Growth, guided by experienced managers such as Jed Weiss, have navigated these dynamics by identifying powerful thematic trends, from the global demand for AI chips to rising defense spending and industry consolidation. While facing specific challenges from AI’s disruptive forces, the fund’s long-term track record underscores the enduring value of disciplined, theme-driven growth investing in the diverse and evolving landscape of international markets. For investors looking abroad, understanding these underlying currents and the strategies employed to harness them remains crucial for long-term success.