International Value’s Huge 2022 Outperformance: Buy EFV

Few investment outlooks are scoffed at more than when a major research firm issues a 10-year expected return forecast. I fully acknowledge that these predictions should be taken with a massive grain of salt. After all, the future can look a whole lot different than the past, and the historical accuracy of such prognostications is sketchy at best.

Nevertheless, if there is one I’d go with, it would be what Vanguard Group dishes out. Each month, the investor-owned mutual fund company refreshes its asset class risk and return viewpoint. It covers various stock and bond market areas. In general, the fixed-income piece is actually somewhat easy to accurately estimate what future returns will be – the starting yield to maturity is a rather good indication of what investors should expect to earn. The stock market piece is much more of a finger to the wind.

So, what does Vanguard see in the decade ahead? Before inflation, the Pennsylvania-based company forecasts U.S. growth stocks to have a negative total return. Value stocks should do much better, while small-caps might do a smidgen ahead of large-caps. The real area of hope for diversified equity investors is seen in foreign markets. Others see international value as doing even better, according to Morningstar.

Vanguard Group’s Asset Class Return Outlook

That brings me to an ETF I think will do well over the coming decade: the iShares MSCI EAFE Value Fund (BATS:EFV). According to iShares, EFV seeks to track the investment results of an index composed of developed market equities, excluding the U.S. and Canada, that exhibit value characteristics. The expense ratio is 0.35% while its average bid/ask spread is very tight at just 0.02%.

EFV also sports a trailing 12-month yield north of 4% while its equity beta is 0.91. So, investors can think of international value as a little defensive with a steady income stream. Top holdings include Shell, Novartis, Toyota, and BHP Group. The portfolio as a whole is not concentrated – the top holding is less than 3% of the ETF. From a sector perspective, you can really see the value and cyclical tilts. Financials represent a quarter of the fund, while Industrials, Materials, and Energy combine for nearly one-third of EFV. Very little tech here.

EFV Sector Breakdown: Lots of Cyclical Exposure, Very Little TMT

EFV has dreadful long-term performance vs the S&P 500 ETF (SPY). Since the start of 2006, EFV is up 40%, including dividends, while SPY has surged 336%. So why would an investor want to own EFV?

EFV’s Sharp Underperformance Since 2006 Inception

If forecasters are right, and the value/growth regime changes, along with a relative rebound in ex-US stocks, then EFV is the place to be. Just look at returns so far this year. Global developed market value shares outside of the US are down just 2% vs a 13.5% drop on SPY. The trend back to the mean might just be getting started.

EFV Shines During 2022’s Volatility

Consider that EAFA stock valuations are quite cheap now at just a 12.6x forward P/E multiple. The U.S. stock market valuation, on the other hand, is 17.2x, according to Ed Yardeni’s research.

Global Forward Price-to-Earnings: Foreign Stocks Are Cheap

I also like to review the valuation perspectives from J.P. Morgan Asset Management. International P/Es are indeed very favorable vs. the S&P 500’s while dividend yield comparisons also favor an overweight to foreign value shares.

International Valuations Impressive: P/E And Relative Yield

The problem for short- and intermediate-term investors is that EFV’s chart is lackluster, to put it nicely. The 2007 high is nowhere in sight vs the current price. Bulls want to at least see EFV climb above the $60 level to suggest a bullish trend has begun.

EFV Long-Term Chart: Lousy Returns Since 2007

The Bottom Line

I am bullish on international value from an absolute and relative value perspective. The technical chart is poor, though, so I understand those who might steer away from it right now. Still, relative strength in 2022 has been massive, and I believe it’s the beginning of a major long-term investment story. I’d begin accumulating shares of EFV here.