Nearly a year ago, we looked at USAA World Growth (USAWX) as a solid option for investors seeking global exposure without currency hedging. Central banks at the time were cutting interest rates and expanding asset purchases, a trend that has continued into 2016. The Bank of Japan reduced interest rates to below zero and the European Central Bank is further cutting already negative rates. The United States remains a beneficiary of these policies thanks to the relatively high yield of domestic assets. The 10-year U.S. Treasury yields 1.76 percent, while the German 10-year government bond yield is about 0.10 percent and the Japanese 10-year provides a negative return. Investors attaining international exposure through global funds with U.S. exposure have done much better than those holding purely international funds.
USAWX has performed well as it outperforms its peer group during down markets. Vanguard Global Equity (VHGEX) is down 1.27 percent in 2016 as of April 10, while USAWX has gained 1.07 percent. That return also puts USAWX ahead of the 0.18 percent gain in the S&P 500 Index, and far ahead of the 5.30 percent loss in the MSCI EAFE Index. Over the past year, USAWX has a downside capture ratio of 61.42 percent versus the MSCI EAFE, meaning it fell about 61.42 percent of the index. When the MSCI EAFE was moving higher, USAWX captured 76.79 percent of the gains. Over the past five years the numbers are more impressive: USAWX captured 102.70 percent of the upside in the MSCI EAFE, but was only exposed to 64.36 percent of its losses.
Investment Strategy
Boasting a five-star rating from Morningstar, the actively managed USAWX seeks capital appreciation through investments in both domestic and foreign securities. Holdings include common shares, preferred stock and depository receipts as well as convertible securities, rights and warrants.
Sub-advisor MFS, under the guidance of fund managers David Mannheim and Roger Morley, oversees USAWX. With the first interest rate hike in nine years by the Federal Reserve, MFS sees a divergence in monetary policies and global economies as the main themes for 2016. They anticipate a strong domestic labor market, a high return on equity and lower input costs that will support a stronger U.S. economy. MFS also expects the European Central Bank, the Bank of Japan and the People’s Bank of China to continue their accommodative monetary policies. While managers do not expect any recession-triggering events, they do believe that equity markets are fully valued as many global economies continue to face headwinds. These challenges include slowing growth in China, falling commodity prices and earnings downgrades. In recent quarters, market leadership has also narrowed significantly. As a result, the managers remain focused on company fundamentals and taking advantage of positive shifts in valuations.
Uncompromising in their investment standards, Mannheim and Morley allow their stock-picking acumen to produce country and sector weightings that differ from the MSCI World Index, the fund’s underlying benchmark. Managers use a mix of fundamental metrics to identify stocks that have the potential for growth while adhering to important value metrics. Investment criteria include good free cash flow, a sound balance sheet and a seasoned management team.
Portfolio Composition and Holdings
Following the strategy has resulted in the portfolio generally holding between 80 and 100 prominent blue-chip companies demonstrating high returns on equity. The portfolio has a relatively higher market capitalization compared with its category peers. The fund is overweight consumer-oriented stocks while being underweight communication services, energy and utility sectors. The fund limits its direct exposure to emerging market companies, preferring to focus on firms that are headquartered in the developed world, even those that may have extensive operations in developing nations.
In contrast to the category averages, the fund has 54.74 percent exposure to domestic stocks and 43.83 percent in foreign positions. The fund’s foreign exposure is primarily in developed Europe, while it underweights Asian markets.
The portfolio has a price-to-book ratio of 2.88 and a price-to-earnings ratio of 19.9. It has a trailing 12-month yield of 0.70 percent.
The 13 percent turnover rate is well below the category average of 60 percent. Low turnover is key for both low costs and superior tax efficiency. Since 2013, it has paid out only about 3.5 percent of assets as capital gains.
Historical Performance
USAWX has performed well over the past year. Its modest exposure to the volatile energy sector and other cyclical areas helped limit downside risk. A hefty position in the consumer defensive sector was a major contributor to the fund’s category-beating performance. The fund has delivered annualized 3- and 5-year total returns of a 6.83 and 8.19 percent, respectively. These handily beat the category returns of 4.90 and 5.13 percent over the same periods. The fund has also outperformed its benchmark index.
Fees and Expenses
Although USAA targets a unique audience comprising primarily members of the armed forces and their families, anyone can purchase shares of the fund. Established in 1992, USAWX has a $3,000 initial minimum investment as well as a $50 minimum for subsequent contributions. This $1.2 billion no-load fund has delivered a 6.7 percent annualized return over the past decade. The 1.17 percent management fee is on the high side compared with Vanguard funds, but it is on par with its category average.
Outlook
In this challenging business environment, sub-advisor MFS will continue its proven long-term strategy of identifying profitable trends. This includes favoring global consumer staples and luxury goods firms that feature a diverse geographical footprint, strong brands and the potential for above-average growth rates. Managers also see positive long-term prospects in companies operating in emerging markets with expanding middle class consumer markets, which can lead to pricing power and increased revenues.
USAWX won’t beat its competition in a very strong bull market, but the fund has been less volatile than its peers and benchmark index over the long term, plus it holds up far better under adverse conditions. As a result, USAWX is an excellent option for investors looking for global exposure with moderate risk.