Simon Webber, left, and James Gautrey co-manage the Hartford Schroders International Stock fund.
Illustration by Ryan Melgar
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On Wall Street, most analysts hate surprises, favoring companies with steady predictable earnings growth. Not James Gautrey and Simon Webber.
The co-managers of the
Hartford Schroders International Stock
fund (ticker: SCIEX) seek “unanticipated growth,” Gautrey says. “We call it a growth gap. For us, one of the best sources of consistent alpha [or outperformance] is in earnings surprises, where we can take a differentiated view to the market.”
Their strategy works. The $1.9 billion fund’s 16.1% five-year annualized return beats 98% of its peers in
Morningstar’s
Foreign Large Blend category. Its 7.6% 10-year number beats 95%. The fund has done this with comparable volatility to its peers and benchmark, MSCI ACWI Ex USA. And it has an 0.85% expense ratio, below-average for the foreign stock category, in its institutional share-class, which can be purchased for $2,000.
Of course, any stock would benefit from a positive earnings surprise. The challenge is figuring out which companies will have such surprises—before they occur. To do that, you must have the analytical capabilities to figure out what the Street’s analysts and the market are missing. The fund employs 11 global sector specialists who refine the stock recommendations of
Schroders
’ more than 100 global equity analysts. Gautrey, 41, and Webber, 47, then make the final investment calls. Webber is lead manager of Schroders’ Global and International Equities team, and oversees some $30 billion, but Gautrey is lead manager of this particular fund.
The fund distinguishes itself from other Schroders funds by being concentrated; it currently holds about 50 stocks. “It’s the most concentrated form of our international equity strategy,” Webber says, “the best ideas we have as a team.”
The portfolio falls into two buckets, Gautrey explains: core stocks and opportunistic stocks. Core stocks, which usually make up 60% to 70% of the portfolio’s assets, “are high-return-on-invested-capital businesses with structural competitive advantages and good management teams.”
The so-called opportunistic names—a company experiencing a turnaround, say—make up the rest of the portfolio. “These are shorter-term holdings, where, again, we see an earnings-growth gap, a difference versus consensus [analyst expectations],” he says. It’s not that the managers disregard the short term in picking their core stocks, but “the compounding effect of those high-quality businesses is what the market often underestimates in the long term.”
One core stock is Latin American e-commerce giant
MercadoLibre
(MELI), which the fund purchased toward the end of 2019, though Gautrey had been investigating it for over a decade. His reservation: “Politics and macroeconomics in Latin America can be pretty volatile.” But Mercado’s management team impressed him over time. “They managed through everything—amazing currency devaluations, overturning of governments, [government] debt defaults.”
Mercado has distinct advantages over comparable e-commerce players. First, e-commerce penetration in Latin America is a fraction of that in the U.S., roughly around 3%, Gautrey says. Mercado also has built out its warehouse, trucking, and delivery infrastructure—much like
Amazon.com
(AMZN), but with one key distinction. “Particularly when you go into emerging markets, relying on the nationalized postal infrastructure can mean a delivery takes several days to arrive,” Gautrey says. “Building out your own logistics infrastructure can dramatically improve the consumer experience. And then having that infrastructure also acts as a barrier to entry for [competitors].” The stock is up 178% in the past year, yet Gautrey thinks the market continues to underestimate its potential.
Among the fund’s opportunistic plays is
Equinor
(EQNR), a Norwegian energy company, which has a negative 2.2% three-year annualized return. The team began looking at the stock last April, in the pandemic crash, and bought the stock in May when oil was about $40 a barrel. One argument for the stock was “that $60 oil was likely, as soon as we get economic normalization again,” Webber says. Oil is now at $59.
But the less-understood opportunity in Equinor involves alternative energy. Equinor conducts oil exploration on the shallow Norwegian continental shelf. But “it’s also very well-suited for offshore wind [farms],” Webber explains. “We found the development of [Equinor’s] expertise in offshore wind is really flying below the radar screen.” Also, Norway is investing heavily in alternative hydrogen fuel and carbon-capture programs, and Equinor has “leading expertise” in both areas, Webber says. “That will position them to be one of the few incumbents that are able to transition away from being too reliant on fossil fuel business,” he says. But Equinor is only a temporary play as the fossil fuel industry as a whole is in “secular decline,” he adds.
Sometimes core and opportunity stocks can be in the same sector. Some of the biggest opportunities the team has found recently have been in the financial sector—18% of the fund’s portfolio. The fund has opportunistic plays in European banks, such as Italy’s
Intesa Sanpaolo
(ISP.Italy) and Sweden’s
Svenska Handelsbanken
(SHBA.Sweden), purchased during the stock market’s 2020 slide. “These are more shorter-term holdings, where I think loan losses are overestimated,” Gautrey says.
In contrast, the fund has held core Asian financial plays—India’s
HDFC Bank
(HDB) and Hong Kong insurer
AIA Group
(1299.Hong Kong)—for years. Growth rates in financial services are better in Asia, where a burgeoning middle class is increasingly embracing banking and insurance.
AIA “is probably the world’s best-run life insurer,” and HDFC Bank is “one of the best-run banks,” Gautrey says. Those are the kind of companies where the surprise isn’t that they are currently doing well, but just how well they will do over time.
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