By Debbie Carlson

The Trump administration is swinging tariff threats against allies and adversaries alike, and international stocks are outperforming the S&P 500 index in 2025 after years of underperformance.

For Luiz Sauerbronn, co-manager of the $1.2 billion Brandes International Equity fund, and his four co-managers, macroeconomic backdrops inform their thinking but don't change their classic value-focused, bottom-up fundamental stock-picking method.

The co-managers run scenarios on every holding to calculate potential macroeconomic impacts, how long those impacts may last, and if the company can withstand the change.

The team seeks to buy resilient companies at low valuations and hold them long term, exploiting biases other investors may have. Take Mexican real estate investment trust Fibra Uno Administracion, the fund's No. 34 holding. With the Trump administration potentially leveling 25% tariffs on Mexico, some investors may shy away from the country.

About 45% of Fibra Uno's business is linked to industrial use, and the stock price is down over worries about how tariffs may affect manufacturing exports to the U.S., Sauerbronn says. Yet much of its industrial exposure is in domestic logistics, less likely to be impacted by tariffs. Fibra Uno pays a dividend yield of 10%-plus, and its funds from operations -- a REIT performance metric similar to a price/earnings multiple -- is in the single digits.

"At that price, this [holding] can withstand a lot of volatility from whatever the president does," he says.

This contrarian thinking has helped International Equity outperform its peers and the benchmark MSCI EAFE Value Index over the long term. Over the past 10 years, the fund has returned an average annualized 6.6%, compared with 5.4% for its benchmark and 5.5% for its peers, putting it in the top 8% of its category.

Morningstar rates it a four-star, gold medalist fund, noting it charges a below-average 1.12% annual fee. The fund has a front load of 5.75%, which is waived at platforms such as Charles Schwab and Fidelity.

International Equity is managed by an investment committee team, like other strategies at Brandes Investment Partners, allowing them to incorporate different perspectives. Sauerbronn's four co-managers -- Brent Woods, Amelia Morris, Jeffrey Germain, and Shingo Omura -- are also analysts who focus on specific industries.

The team is supported by about 45 additional analysts and research associates who recommend possible investments to the committee, based on a company's intrinsic value rather than price. That gives analysts confidence to suggest out-of-favor stocks without worrying about getting price calls right, Sauerbronn says. The investment committee does its own assessment of intrinsic value before deciding whether to add a position.

The fund has a low 31% turnover, and the objective is to hold names for three to five years, or longer if the thesis holds. The goal is to find stocks with a large margin of safety by seeking names that are trading at large discounts to their intrinsic value, preferably around 30% to 40%.

The team reviews the portfolio weekly, and before adding a position, the committee will look at the candidate versus what the fund already owns to avoid concentration or correlation risk. "We think of risk as the possibility of permanent impairment of capital," Sauerbronn says.

The committee votes on adding stocks and seeks consensus as much as possible, and the majority rules.

International Equity seeks gains of 50% on its holdings, but that target also depends on the managers' conviction in their margin-of-safety evaluation. They will sell a holding before it reaches intrinsic value if they believe there are better opportunities available, or if their assessment of the company has changed.

Sauerbronn says the committee has been increasing the positions of a few longtime holdings as prices look attractive. One of those holdings is Swatch, which owns luxury watch brands such as Omega and Longines and is one of the biggest makers of watch movements for competitors.

The watchmaker has struggled under China's cooling luxury market, and Swatch's short-term outlook is hazy, "but the risk/reward at the current price seems very compelling if you're patient," Sauerbronn says.

It sells for less than 10 times last year's earnings and has a dividend yield of 4.3%, not including its excess inventory of gold, diamonds, and real estate that it can sell if needed, he adds.

International Equity is also bolstering its position in its No. 9 holding, Carrefour. Investors have soured on the French grocer. The stock's weak price may reflect worries about the country's budget and other political issues in France, along with its exposure to out-of-favor countries such as Brazil and Argentina. The team is paying between eight and nine times earnings for the stock, which has a dividend yield over 6%, making Carrefour attractive at this price.

"Groceries tend to be a very resilient business," Sauerbronn says.

U.K. drugmaker GSK, the fund's No. 4 holding, is trading at 8.6 times next year's consensus earnings and has a dividend yield of 4.3%. GSK has strong vaccine franchises, but its large exposure to the U.S. market and fears of declining vaccine use in the U.S. could be affecting the company, Sauerbronn says. At current valuations, he suggests that the company can ride out temporary dips.

"We don't know what the new government's going to do, but whatever it is, it's not going to be permanent. The franchise is permanent, and [its sales are] not just in U.S.," he says.

Sauerbronn isn't predicting that international markets will keep their crown. Rather, he points to international companies' relative cheapness versus U.S. companies as a compelling reason to diversify. Even if foreign markets don't stay ahead of their U.S. counterparts, International Equity doesn't need a leadership shift to perform, he says.

"We're not in the business of predicting the future. But we don't need to know that, when you're buying companies at a very attractive earnings yield," he says.

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March 19, 2025 02:00 ET (06:00 GMT)

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