Video Reports

Link to this video

Get LinkLicensePrint
Bookmark and Share

By Jeffrey Bunce, CFA | 03-23-2018

Two international equity funds that work well together

CI Black Creek International and Oakmark International are distinct from each other but have complementary characteristics.

Jeffrey Bunce: Combining multiple funds from the same asset class, when done properly, should help smooth out your asset class return pattern and remove some risk from the equation. At Morningstar Investment Management, when combining funds, we first look for each to be distinct in its own right. Ultimately, we want to start with high-conviction, concentrated funds that we think can beat the asset class benchmark and provide differentiated returns. We've got two international equity funds that we use in our Morningstar target-risk portfolios that we think fit that bill.

Both CI Black Creek International and Oakmark International are highly differentiated funds from their benchmark, the MSCI EAFE Index, with active shares of 98% and 90%, respectively, meaning they share little in common with the index. When combining the two, the result is a portfolio that still looks very different from the benchmark. In general, you want to avoid a situation where combining two or more differentiated funds results in a portfolio that looks and acts like the benchmark because after fees, you're more likely to underperform.

Next, we want to make sure the funds are fishing, as much as possible, in different ponds. Just like we don't want to look like the benchmark, we also don't want two funds doubling down on the same risk factors, as that won't help us achieve our desired diversification.

So, looking more closely at the funds, Black Creek currently has an average market cap of $11 billion vs $50 billion for Oakmark, meaning that Black Creek is on average, targeting smaller, mid-size companies whereas Oakmark has a higher allocation to larger companies. Further, from a style perspective, Black Creek follows a quality approach and currently plots in the large-core region of the Morningstar Style Box. Meanwhile, Oakmark takes an absolute value approach and typically holds cheaper-priced companies. True to form, it plots in the large-value region of the Morningstar Style Box.

We can also ensure the two funds are investing differently by comparing the overlap in holdings between them. For instance, of Black Creek's 33 holdings and Oakmark's 58 holdings, only 2 stocks, Lloyds Banking Group and Grupo Televisa, representing a little over 5% of the portfolios, are held in common.

By now, we have a pretty good idea that each fund is unique from the other. But we don't stop there, we do further work examining sector and country allocations, as well as looking at historical performance patterns and characteristics to further gain confidence that the two are indeed complements to each other.

Overall, we have conviction in each fund by itself, but by combining them together to represent our active international equity allocation, we think the sum can be greater than the parts.

For Morningstar, I'm Jeff Bunce.

{1}
{1}
{2}