Touchstone International Value Fund: Concentrated Bets on Clorox and Alibaba Bet Big on Long-Term Value Recognition

The fund's approach is built on a simple, enduring principle: buy quality at a price. It employs a classic value-driven fundamental process that uses five valuation screens to systematically identify companies believed to be selling at a discount to their intrinsic value. This model-driven framework is designed to minimize emotional bias, turning the search for bargains into a repeatable discipline rather than a reactive gamble.

The process leads to a highly concentrated portfolio. The manager's conviction is clear: our top three positions represent 82% of the portfolio. This isn't a bet on diversification; it's a bet on a handful of deeply researched ideas that offer asymmetric risk/reward at current prices. The concentration is intentional, acknowledging it will drive volatility, but it reflects the belief that a few powerful, long-term compounding machines are more valuable than a broad, diluted basket.

This is where the true test of the strategy emerges. The manager explicitly frames the investment horizon in patient terms, stating that decisions won't be validated by next quarter's performance-they'll be measured over the next 3-5 year period. This long-term view is the antidote to quarterly noise. It's the discipline that kept the fund out of frothy AI infrastructure at extreme valuations, and it's the same discipline that now has it buying Clorox during a crisis or holding Alibaba through political turbulence. The process is designed to endure these dislocations, confident that over a multi-year cycle, the market will eventually recognize the underlying value.

Recent Performance and the Role of Concentration

The fund's recent quarter serves as a textbook lesson in the volatility inherent to a concentrated, patient capital strategy. For the quarter ended December 2025, the Touchstone Non-U.S. Equity Fund underperformed its benchmark, the MSCI All Country World Ex-U.S. Index. This result is not a failure of the model, but a direct consequence of its execution. The fund's heavy exposure to a few large, specific positions magnifies the impact of company-specific setbacks, creating a performance path that will inevitably diverge from the broader market in the short term.

The underperformance was driven by challenges in its top holdings. The manager's own commentary highlights the "why": the same discipline that led to buying Clorox during an ERP crisis and holding Alibaba through political headlines creates a portfolio that is deeply exposed to these discrete, often unpredictable, events. When a concentrated bet hits a temporary snag, the entire fund's return is pulled down. This is the trade-off for conviction.

Furthermore, the fund's core mandate-investing in non-U.S. developed and emerging markets-exposes it to forces beyond corporate management. Currency fluctuations and geopolitical risks are permanent features of international investing, capable of creating volatility independent of a company's underlying business quality. While the quantitative model seeks to identify undervalued securities, it cannot shield the portfolio from the broader turbulence of global markets. The fund's heavy exposure to international equities means it must navigate this landscape, accepting that such risks can pressure returns in any given quarter.

The bottom line is that this quarter's result is a classic value investor's dilemma. The fund is paying a price for its concentration and its international focus, but it is doing so with full awareness. The manager frames the test in multi-year terms, not quarterly ones. The volatility is the cost of admission for a strategy built on identifying deep value during periods of dislocation. For a patient capital approach, a single quarter's underperformance is noise. The real question is whether the fundamental value in those concentrated holdings will eventually be recognized, a test that will be measured in years, not quarters.

Valuation, Risk, and the Margin of Safety

The fund's entire thesis rests on finding a margin of safety-a gap between a business's current price and its estimated intrinsic value. Its approach is explicitly designed to identify companies where that gap offers asymmetric risk/reward. The manager's conviction is clear: the concentrated bets, like Clorox during a crisis or Alibaba amid political noise, are made because the perceived value at current prices outweighs the known risks. This is the core of the value investor's playbook: buy a dollar's worth of business for fifty cents, with a cushion against error.

The primary risk to this thesis is the patience required. The fund's heavy concentration means its performance will be dictated by a few stories, not a broad market. When those stories face headwinds-whether operational, political, or currency-driven-the portfolio will underperform, as it did last quarter. The manager acknowledges this, framing the test in 3-5 year terms. For investors, the risk is not just market volatility, but the psychological risk of abandoning a strategy during a period of underperformance. The fund's success hinges entirely on the discipline of its investors to hold through these cycles.

A broader market shift could provide a crucial tailwind. The current asset allocation outlook is cautiously optimistic on domestic equities but explicitly underweight international equities. This creates a challenging environment for the fund's mandate, which is to invest in non-U.S. developed and emerging markets. The fund is positioned against the prevailing sentiment, which favors domestic over international. For its thesis to validate, the market may need to re-rate international assets, perhaps as a monetary policy pivot and a resilient U.S. economy create a more balanced global risk appetite. Until then, the fund's international focus is a source of potential underperformance.

The bottom line is that the fund's positioning is one of deliberate contrarianism. It seeks value where others are cautious, concentrating capital on a few deeply researched ideas. The margin of safety is in the valuation discount, but the path to realizing it is long and uncertain. Success will be measured not by quarterly returns, but by whether, over the next several years, the market closes the gap between price and value for its concentrated holdings. For patient capital, that is the only metric that matters.

Catalysts and Watchpoints for the Thesis

The fund's strategy is built on waiting for value to be recognized. The primary catalyst for validation is the resolution of company-specific issues in its concentrated holdings. The manager's own words frame this: conviction requires patience measured in years, not quarters. The fund is holding through events like an ERP crisis at Clorox or political turbulence around Alibaba, betting that these dislocations will eventually clear. The catalyst is the point where the market's perception of these businesses realigns with their underlying fundamentals, closing the valuation gap. For the thesis to work, these specific stories must play out in the fund's favor over the next several years.

The key watchpoint is the fund's ability to maintain its concentrated, patient strategy without significant outflows. This is the operational risk that could force a sale at a loss. The fund's heavy concentration means its performance will inevitably diverge from the benchmark, especially when its top positions face headwinds. The manager acknowledges this, but the real test is whether investors in the fund have the same long-term discipline. A wave of redemptions during a period of underperformance could force the fund to sell its deeply discounted positions, destroying the margin of safety it was built to capture. Investors should monitor the fund's portfolio turnover rate as a proxy for this risk; high turnover would signal a breakdown in the patient capital approach.

A broader market shift also presents a watchpoint. The fund's mandate is to invest in non-U.S. developed and emerging markets, yet the current asset allocation outlook is cautiously optimistic on domestic equities but explicitly underweighting international equities. This creates a challenging backdrop where the fund is positioned against prevailing sentiment. For its thesis to validate, the market may need to re-rate international assets, perhaps as a monetary policy pivot and a resilient U.S. economy create a more balanced global risk appetite. Until then, the fund's international focus is a source of potential underperformance, and investors must watch for any change in this macroeconomic setup that could either pressure or support its holdings.

The bottom line is that the fund's success hinges on two parallel tracks. First, the specific businesses it owns must navigate their current challenges and demonstrate improvement. Second, the fund itself must endure the volatility of its concentrated bets without being forced to exit. The catalysts are company-specific resolutions; the watchpoints are the fund's operational discipline and the shifting tides of global investor sentiment. For patient capital, the path is clear, but the journey requires unwavering conviction.