FMI International (FMIJX), May 2012

By David Snowball

Objective and strategy

FMI International seeks long-term capital appreciation by investing, mainly, in a focused portfolio of large cap, non-US stocks. The Fund may invest in common and preferred stocks, convertibles, warrants, ADRs and ETFs. It targets firms with global, rather than national, footprints. They describe themselves as looking “for stocks of good businesses that are selling at value prices in an effort to achieve above average performance with below average risk.”

Adviser

Fiduciary Management, Inc., of Milwaukee, Wisconsin. FMI was founded in 1980 and is employee owned.  They manage over $14.5 billion in assets for domestic and international institutions, individual investors and RIAs through separately managed accounts and the five FMI funds.

Managers

A nine-person management team, directed by CEO Ted Kellner and Patrick English.  Mr. Kellner has been with the firm since 1980, Mr. English since 1986.  Kellner and English also co-manage FMI Common Stock (FMIMX), a solid, risk-conscious small- to mid-value fund which is closed to new investors and FMI Large Cap (FMIHX).  The team manages three other funds and nearly 900 separate accounts, valued at about $5.3 billion.

Inception

December 31, 2010.

Management’s Stake in the Fund

As of December 2011, all nine managers were invested in the fund, with substantial investments by the three senior members (in excess of $100,000) and fair-sized investments ($10,000 – $100,000) by most of the younger members.  In addition, five of the fund’s six directors had substantial investments ($50,000 and up) in the fund.  Collectively, the fund’s board and officers owned 55% of the fund’s shares.

Minimum investment

$2500 for all accounts.

Expense ratio

1.0% after waivers on an asset base of $22 million.  The expenses before waivers are close to 3%.

Comments

You would expect a lot from a new FMI fund. The other two FMI-managed funds are both outstanding.  FMI Common Stock (FMIMX), a small- to mid-cap core fund launched in 1981, has been outstanding: it has earned Morningstar’s highest designations (Five Stars and a Gold analyst rating), it’s earned Lipper’s highest designations for Total Returns and Preservation of Capital, and it has top tier returns for the past 5, 10 and 15 years.  FMI Large Cap (FMIHX), a large cap core fund launched in 2001, has been outstanding: it has earned Morningstar’s highest designations (Five Stars and a Gold analyst rating), it’s earned Lipper’s highest designations for Total Returns, Consistency and Preservation of Capital, and it has top tier returns for the past 5 and 10 years. Both are more concentrated (30-40 stocks), more conservative (both have “below average” to “low” risk scores from Morningstar), and more deliberate (turnover is less than half their peers’).

Consistent, cautious discipline is their mantra: “While past performance may not be indicative of the future, we can assure our shareholders that FMI’s investment process will remain the same as it has for over 30 years, with a steadfast focus on fundamental research and an emphasis on avoiding permanent impairment of capital.”

Since FMI International is run by the same team, using the same investment discipline, you’d have reason to expect a lot of it.  And, so far, your expectations would have been more than met.

Like its siblings, International has posted top-tier returns.  $10,000 invested at the fund’s lunch at the end of 2010 would now be worth $10,000 by the end of April 2012.  In that same period, its average peer would have lost $500.  Like its siblings, International has excelled in turbulent markets and been competitive in quickly rising ones.  At the end of March, FMI’s managers noted “Since inception, the performance of the Fund has been consistent with FMI’s long-term track record in domestic equities, generally outperforming in periods of distress, while lagging during sharp market rallies.”

It’s important to note that the FMI funds post strong absolute returns in the years in which the markets turn froth and they lag their peers.  Common Stock badly trailed its peers in four of the past 11 years (2003, 07, 10 and YTD 12) but posted an average 15.4% return in those years.  Large Cap lagged three times (2007, 10, and YTD 12) but posted 10.6% returns in those years.  For both funds, their performance in these “bad” years is better than their own overall long-term records.

A number of factors distinguish FMI from the average large cap international fund:

  1. It’s noticeably more concentrated.  The fund holds 26 stocks.80-120 would be far more typical.
  2. It has a large stake in North American stocks.  The US and Canada consume 30% of the portfolio (as of March 2012), with U.S. multinationals occupying as much space in the portfolio (19%) as SEC rules permit.  A 4% stake would be more common.
  3. It has a long holding period, about seven years, which is reflected in a 12% portfolio turnover.  60% turnover is about average.
  4. It avoids direct exposure to emerging markets.  There are no traditionally “emerging markets” stocks in the portfolio, though all of the companies in the portfolio derive earnings from the emerging markets.  It is unlikely that investors here will ever see the sort of emerging markets stake that’s typical of such funds. The managers explain that
    • the lack of good data, transparency and trust with respect to accounting, management, return on invested capital, governance, and several other factors makes it impossible for us to look at many international companies in a way that is comparable to how we operate domestically. China is an example of a country where we simply do not have enough trust and confidence in the companies or the government to invest our shareholders’ money.
    • In China there is little respect for intellectual property, and we are not surprised to see massive fraud allegations in the news with regard to Chinese equities. Investors have lost fortunes in companies such as Sino-Forest, MediaExpress, China Agritech, Rino International, and others. While there are sure to be high-quality, reliable mainland China or other emerging market businesses, for now we plan to focus on companies domiciled in developed countries, with accounting, management, and governance we can trust. As we look to invest in multinational companies that generally have a global footprint, we will get exposure to emerging markets without direct investment in the countries themselves. This will allow our shareholders to get the benefits of global diversification, but with a much greater margin of safety.
  5. The fund actively manages its currency exposure.  The managers are deeply skeptical that the euro-zone will survive and are fairly certain that the yen is “dramatically overvalued.”  As a result, they own only two stocks denominated in euros (Henkel and TNT Express) and have hedged both their euro and yen exposure.  As the managers at Tweedy, Browne have noted, the cost of those hedges reduces long-term returns by a little but short-term volatility by a lot.

On top of the manager’s stock selection skills and the fund’s distinctive portfolio, I’d commend them for a very shareholder friendly environment – from the very low expenses for such a small fund to their willingness to close Common Stock – and for really thoughtful writing.  Their shareholder letters are frequently, detailed, thoughtful and literate.  They’re a far cut above the marketing pap generated by many larger companies.  They also update the information on their website (holdings, commentaries, performance comparisons) quite frequently.

Bottom line

All the evidence available suggests that FMI International is a star in the making.  It’s headed by a cautious and consistent team that’s been together for a long while.  Expenses are low, the minimum is low, and FMI’s portfolio of high-quality multinational stocks is likely to produce a smoother, more profitable ride than the vast majority of its competitors.  Investors, and not just conservative ones, who are looking for a risk-conscious approach to international equities owe it to themselves to review this fund.

Company link

FMI International

2013 Q3 Report

RMS (a/k/a FundReveal) provides a discussion of the fund’s risk/return profile, based on their messages of daily volatility, at http://www.fundreveal.com/mutual-fund-blog/2012/05/fmjix-analysis-complementing-mutual-fund-observer-may-1-2012/

© Mutual Fund Observer, 2012. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact us.
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About David Snowball

David Snowball, PhD (Massachusetts). Cofounder, lead writer. David is a Professor of Communication Studies at Augustana College, Rock Island, Illinois, a nationally-recognized college of the liberal arts and sciences, founded in 1860. For a quarter century, David competed in academic debate and coached college debate teams to over 1500 individual victories and 50 tournament championships. When he retired from that research-intensive endeavor, his interest turned to researching fund investing and fund communication strategies. He served as the closing moderator of Brill’s Mutual Funds Interactive (a Forbes “Best of the Web” site), was the Senior Fund Analyst at FundAlarm and author of over 120 fund profiles. David lives in Davenport, Iowa, and spends an amazing amount of time ferrying his son, Will, to baseball tryouts, baseball lessons, baseball practices, baseball games … and social gatherings with young ladies who seem unnervingly interested in him.