Watching for green lights in international equity markets

Halsey: For context, Kenny was one of the original architects behind Vanguard International Core Stock Fund. I was fortunate to be part of that process and served as his co-portfolio manager since the launch in 2019.

Kenny managed a sleeve of Vanguard Explorer Fund for several decades. He also ran a global small-cap strategy that harnessed the multidisciplinary strengths of Wellington’s investment platform. He saw that the same approach could be applied to an international all-cap strategy. That was the genesis of the fund.

We were a unique portfolio manager pairing. I had spent my entire career in Wellington’s Global Industry Research group, whereas Kenny ran diversified portfolios. It was one of the first times Wellington had used that structure. It allowed me to bring my perspective as a career analyst and serve as a direct connector to our research group, which is key to our process. As Kenny was nearing retirement, he wanted to hire a portfolio manager with a profile similar to his to manage the fund alongside me. Anna, who was Kenny’s successor on his global small-cap portfolios, was the obvious choice. Both Wellington and Vanguard place a great deal of emphasis on succession planning, so the transition was a gradual process and well in place by the time Kenny retired.

Anna: I echo all that. Since the start of 2024, Kenny intentionally stepped into more of an advisory role on the team. Kenny, Halsey, and I were disciplined about spending time in person with one another, whether in London where I’m based, or in Boston where Wellington is headquartered. It was important that we not only spend time with one another, but with the investment professionals at the firm who are doing interesting work and contributing to the fund.

In the months leading up to his retirement, Kenny was spending less time on stock selection and more time ensuring that we were benefitting from the insights of our colleagues and taking full advantage of the synergies across the firm.

Anna: When the opportunity to interview with Wellington came up, I was very interested because of the firm’s emphasis on collaboration and the capabilities of the investment platform, which I believe are truly unmatched.

When I joined Wellington a little more than seven years ago, I was a dedicated Pan-European small-cap investor, so I had a high degree of overlap and collaboration with Kenny’s global small-cap strategy. That transition felt like a very natural evolution in my career.

When the opportunity arose to step into a co-portfolio manager role on Vanguard International Core Stock Fund, it also felt fitting. I had the global experience—and risk management is so integral to this team’s process and DNA. In my view, you cannot be a small-cap investor without a deep understanding and appreciation for risk controls. So, it felt natural to bring my experience in risk, diversified portfolio construction, and global investing to the fund. 

Halsey: The fund is designed to bring the best of Wellington to an international portfolio. We’re looking for pools of alpha in collaboration with the different investment disciplines across the Wellington platform. That’s our edge—having access to a team of investment professionals from different functions and regions. We believe we are strong connectors of ideas from across the firm and can quickly recognize when sentiment is changing. For example, is a global industry analyst who’s been bearish for years turning more incrementally positive? Should we be leaning more into that? Anna and I are plugged into that investment dialogue. It’s also important that we seek out contrasting views around the firm. All those inputs help us focus where we need to really dig in with our own fundamental research. 

Halsey: As lead portfolio managers, Anna and I are supported by an extended team that includes experts from several disciplines including quant, macro, and environmental, social, and governance (ESG). We also have investors from other teams who join our weekly meetings and share what they’re seeing. For example, a Wellington research analyst in Singapore who shares his insights with us and better connects us with the Asia-Pacific markets. It’s a truly global team.

In addition to looking for the best ideas across disciplines, we emphasize risk management, which is especially important in international markets. When we launched the fund in 2019, we couldn’t have anticipated all the black swan events that occurred, from a global pandemic to wars in Europe and the Middle East, increased political turmoil, and drastic increases in interest rates.

Anna: You can think of our process as a traffic light system. We get inputs from the fundamental side, such as ratings from our global industry analysts and input from other investment teams at the firm. We marry that with signals we get from the quant team, macro strategists, and ESG analysts. Ultimately, we’re looking for green lights from each discipline. This helps us focus our attention on the stocks we own, or don’t own and make decisions as a team. In the end, Halsey and I make final decisions together. 

Anna: One of our larger holdings is Recruit Group, a Japan-based human resources technology company. The parent company is in Tokyo, but many people would be familiar with some of Recruit’s businesses, like job search company Indeed and employer review site Glassdoor. The global industry analyst who covers Asia technology companies had flagged it as a compelling idea due to improvements in its pricing model, stronger competitive positioning since the pandemic, and better margins in the HR technology segment. The stock also screened well from a quant perspective, and the ESG analyst covering the company indicated positive signals there as well. So, we had the multiple green lights lined up, which directed us to do further research. Ultimately, after I traveled to Tokyo to meet with the management team, Halsey and I decided to initiate a position in the stock.  

Halsey: Our portfolio positioning is driven more by our individual stock selection, but as international investors, the macro picture is a critical part of the mosaic.

I’d point to two areas that we’re finding more interesting right now. One is South Korea, which seems to be taking a leaf out of Japan’s playbook in that there is an effort to make corporations more shareholder-friendly. We’ve had the opportunity to invest in a handful of leading global companies domiciled in South Korea, which have been trading at attractive valuations versus peers. The other area I’d highlight is the United Kingdom. We may be entering a period of relative political stability there, and we see many high-quality global champions trading at a discount, as well as a few domestic leaders that we find interesting. 

Anna: One timely example of a tailwind is Japan. That market had done incredibly well prior to the recent bout of volatility, so we eliminated some of our Japanese stocks that we believed were overvalued. That said, we continue to find the Japan market compelling given ongoing positive trends in corporate governance and structural changes that should incentivize companies to be more shareholder-friendly.

On headwinds, earlier this year our risk dashboards signaled to us that our momentum exposure was steadily increasing. Since we intentionally design the portfolio to avoid outsized factor bets, that has been a trickier place for us to operate in, as we don’t know how long the momentum play will last. 

Halsey: When we launched the fund in 2019, we didn’t know what was around the corner in terms of significant global and macro events. What we do know is that we’ve seen a great deal of volatility in the five years since we started managing the fund, and we don’t see that abating anytime soon. That’s why the framework of our process is so important—we’re well connected to macro and industry analysts, and we have an obsessive focus on risk management. We don’t want any outsized factors or country or regional bets to have an outsized impact on the portfolio. Lastly, we take a three-to-five-year view, but it’s also important that we respond quickly when something changes.

*The fund’s standardized performance can be found here.