An International Growth Fund’s Country-First Approach Pays Off

“Top-down macro influences are very, very important,” says Schulz, who launched the strategy behind the $829 million

Federated Hermes International Growth
fund (ticker: PIGDX) in 1997 in the midst of the Asian financial crisis. “The last thing we want to be doing is investing our client’s hard-earned money in markets that are overvalued, like they were in those days.”

To that end, his Cleveland-based team starts the investment process with a monthly macroeconomic analysis that guides their country weightings relative to the MSCI ACWI Ex USA Growth index. Recently, they’ve been increasing their positions in parts of Europe, Japan, and China, while the fund’s 28% allocation to emerging markets is its highest ever. “That’s where we’re seeing valuation support, less risk, and growth,” Schulz says.

He launched the strategy while working for National City, which merged with PNC in 2009. In 2019, Pittsburgh-based

Federated Hermes

(FHI) acquired PNC’s mutual fund business. Schulz’s nine-person team moved to new offices but otherwise didn’t miss a beat.

Institutional shares of the fund have returned an average of 18.3% a year over the past five years, better than 91% of foreign large-growth funds tracked by Morningstar. Investors can now access the fund with no minimum via R6 shares (REIGX), which carry an expense ratio of 0.84%. This 84-holding portfolio also serves as the growth sleeve of the Morningstar bronze-rated $1.7 billion

Federated Hermes International Equity
fund (PMIEX), which Schulz’s team co-manages with value manager Polaris Capital.

With their macroeconomic compass as their guide, “we try to fill those buckets with the best companies we can find,” says Schulz, 58. Company qualities they seek include stable and accelerating earnings growth, solid balance sheets, and clearly defined growth strategies. They integrate environmental, social, and governance factors, and have access to nearly 70 researchers who specialize in ESG at the firm.

They often identify small and midsize companies they can own for years or even decades—they’ve owned

LVMH Moët Hennessy Louis Vuitton

(MC.France) and

Tencent Holdings

(700.Hong Kong) since 2006 and 2007, respectively.

Japan now represents International Growth’s largest country allocation, with 14% of assets. Improving corporate governance, reasonable stock valuations, and a strong post-Covid recovery are just a few of the reasons Schulz is bullish on the country.

The success of another longtime holding, Netherlands-based

ASML Holding

(ASML)—one of the world’s largest manufacturers of semiconductor equipment—prompted the team in 2019 to buy shares of Japan’s

Lasertec

(6920.Japan), which designs and manufactures tools for inspecting and verifying chips made with extreme ultraviolet lithography. “They have a global niche in a growing area,” says Schulz. He predicts the company can grow earnings in excess of 25% a year over the next three years.

Most people associate Olympus Corporation (7733.Japan) with camera equipment, but the Japanese company was founded in the early 1900s as a microscope maker and is returning to its roots. It now has more than a 70% market share of the global endoscopy market, and its new single-use endoscopes represent a significant growth opportunity. “They have a clearly defined plan to be a global medical-technology company,” says Schulz, who bought the stock in 2019.

Investors have reason to be leery of China, where geopolitical tensions and new regulations aimed at narrowing the wealth gap complicate the business landscape. Still, the world’s second-largest economy is simply too big to ignore, says Schulz: “We take a barbell approach, with high-growth tech companies on one end and more-defensive growth on the other.” Chinese companies represent 8% of the fund’s assets.

In early 2020, the fund scooped up

Ganfeng Lithium

(1772.Hong Kong), one of the world’s largest miners and producers of lithium used in electric-vehicle batteries. “They have strong production growth for lithium compounds and have locked in [access to lithium] around the world,” says Schulz. Ganfeng can grow its earnings a whopping 40% a year over the next five years, he says, thanks to surging demand for EV batteries.

In Europe, Schulz is partial to companies based in countries outside the European Union, which “are more open economies and less hampered by regulations,” he says. In Switzerland, chemical company Sika (SIKA.Switzerland) makes additives that improve the qualities of cement used in construction. There is a strong sustainability component, he says: “It makes building materials stronger and lighter and improves insulation, and with less water and construction waste.” The company has been growing through mergers and acquisitions, says Schulz, who bought the stock in April 2020.

Within the EU, Sweden is home to five companies in the portfolio. One favorite is

Vitrolife

(VITR.Sweden), which provides a range of products and services that reproductive clinics use to provide in vitro fertilization. Schulz first bought the company in 2015, when it had a $500 million market valuation versus about $7 billion now.

As demand for IVF grows, clinics are investing in products and technology that can improve their operations and success rates. The company is also entering new markets like China, where demand for IVF was growing 25% a year before the pandemic. “Covid obviously had a big effect on the market because people put that on hold for a while,” Schulz says. “Now we’re seeing demand bounce back across the globe.”

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