Colruyt makes a virtue of simplicity. The Belgian supermarket chain operator stocks the shelves of its warehouse-style outlets high with private label and branded goods and operates with a tight balance sheet that enables it to keep prices low and volumes high. “They pass on their low operational costs to their customers in terms of lower prices and, because of this, they continually take market share every year,” says Tony Cousins, chief executive officer and chief investment officer of the $3.64 billion Pyrford International (EAFE, or Europe, Australasia and Far East) Equity Fund. And Pyrford invests in Colruyt.
Pyrford International is just as methodical and straightforward in its approach to managing money. The firm, a London-based arm of BMO Global Asset Management, has three criteria for selecting stocks to hold in its EAFE fund: A stock’s dividend yield has to be higher than that of the benchmark, its debt-to-equity ratio has to be much lower, and its return on equity has to be significantly higher. “All else being equal, over the long term these three tests will mathematically generate a better total return,” says Cousins.
The manager’s proof wins a QED from the market. The Pyrford EAFE fund has generated an average return of 7.91 percent a year from its inception in 1996 through the third quarter of 2013, according to suburban Atlanta-based financial data firm eVestment. The MSCI EAFE index, by contrast, has averaged a return of 5.31 percent during the same period, which translates into a return superiority of 2.61 percent a year for Pyrford.
Cousins’ fund lagged the benchmark in the first nine months of this year, with a return of 13.11 percent versus 16.59 percent for the MSCI EAFE index, but according to the manager, that’s all part of the design. Pyrford’s focus on value means that since 2000 the fund has taken 90 percent of the benchmark’s gains during good times but only 60 percent of the losses during down markets, according to Cousins.
Investors seem to appreciate the formula. As of September 30 Pyrford’s International Equity Fund had assets of $3.64 billion, up 82 percent over the past five years. For the nine quarters from the one ending June 30, 2011, to the one ending September 30, 2013, all EAFE funds had net outflows of $35.7 billion.
Other funds within the EAFE universe have also experienced net inflows lately. BlackRock’s EAFE Equity Index Fund, by far the world’s largest in the category, received net inflows of $1.39 billion during the second quarter, raising its total assets under management to $68.3 billion. The Vanguard Total International Stock Fund received net inflows of $1.08 billion, pushing up its total assets to $24.59 billion.
In September Pyrford International Equity was one of two EAFE large-cap value funds among the ten investment products receiving the most search inquiries by investors and their advisers, according to eVestment, which tracks data on 53,000 funds. The other EAFE fund in the top ten is the Los Angeles–based Causeway International Value Fund. This fund has also significantly outperformed its benchmark, with a 9.57 percent return since its inception in 2001, compared with 6.18 percent for the benchmark, an excess return of 3.39 percent. Causeway also beats the index year-to-date: 19.28 percent versus 16.59 percent. Causeway received net inflows of $159 million in the year ending June 30.
The monthly eVestment survey of search activity also showed a high level of investor interest in EAFE small-cap growth equity funds and EAFE small-cap value equity funds. More important, when you combine all types of EAFE categories into one broad category, it was the third-highest-ranked product segment in terms of search activity, according to Rich Donnellan, product manager, research, at eVestment.
This surge of interest in EAFE funds follows on the heels of net outflows. The pace of net outflows from EAFE funds slowed for three quarters before surging. The net outflow topped $4.09 billion in the fourth quarter of 2012. Net outflows fell to $3.34 billion in the first quarter of 2013 and $3.27 billion in the second. In the third quarter of 2013, net outflows rose sharply, to $13.9 billion.
Colruyt, which has 200 outlets and is based in the Brussels suburb of Halle, Belgium, is a family-controlled company founded in 1925 by Franz Colruyt and now run by his grandson, executive chairman Jef Colruyt. Its business model successfully meets all three of Pyrford’s investing criteria.
Colruyt’s lean operational budget includes lower labor costs than those of its peers, thanks largely to negotiations with local unions. “Belgium has a very inflexible labor force,” Cousins says. “So the ability to have people working for you who will stack shelves and work at the tellers, and sweep the floor and work in the warehouse too, is important.” According to Cousins, this isn’t the case with Colruyt’s biggest competitor in Belgium, Paris-based Carrefour.
Another competitive advantage Colruyt has over Carrefour: the Belgian chain owns all of its stores freehold, translating into lower real estate expenditures. Carrefour, which is losing market share, did a sale and leaseback of its stores and is thus locked into escalating real estate costs. Colruyt also has very low long-term debt, which has been declining over time as a percentage of operating revenues and profits. In 2002 Colruyt’s €28.6 million ($39.2 million) in long-term debt represented 0.95 percent of its revenues. A decade later, in 2012, it held €29.2 million in long-term debt, working out to an even smaller 0.37 percent of revenues.
Testament to Colruyt’s steady gain in market share is its growth in sales, rising from €3.07 billion in 2002 to €7.85 billion in 2012. During the same period earnings before interest, tax and depreciation rose from €234 million to €681 million.
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