International stock funds have had a strong showing in the market rebound. From December 2008 to December 2009, the returns of foreign funds have surpassed those of U.S. stock funds by almost 10 percent, and they have taken the lead in five- and 10-year trailing returns as well, according to Morningstar data. "It is an especially good time to invest overseas now that the U.S. is in a slow, potentially low-growth mode," says Morningstar senior fund analyst Kevin McDevitt. "A lot of growth in the years to come is going to be coming from overseas, most likely in emerging markets." McDevitt says investors should carve out a portion of their portfolio for international stocks to gain exposure to growth outside of the United States. And given that the health of the U.S. dollar is waning, McDevitt says international stock funds also provide currency diversification, which can help balance a portfolio.
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U.S. News has compiled a list of international stock funds that offer some exposure to emerging markets and also have solid long-term performance with relatively low volatility. These five funds have passed the following screen: Each lands in the top quartile of its Morningstar category for the 10 trailing years and has a minimum investment of $10,000 or less, a below-average or low Morningstar risk rating, and a three-year standard deviation (a measure of volatility) that's below its category average.
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American EuroPacific Growth Fund (AEPGX): This is the largest international fund, according to Morningstar, with more than $93 billion in assets as of the end of December 2009. American EuroPacific Growth has accomplished feats most international funds have not—landing in the top quartile of its Morningstar category in 2008, when most funds plummeted, and also in 2009, when markets rallied. The fund's long-term performance is just as strong, as its returns rank in the top 11 percent of the foreign large-blend category over the past decade. The fund's above-average emerging-markets weighting, at 19 percent as of the end of September 2009, boosted its performance in 2009 as these markets soared. The fund also holds a fair amount of cash at times, which it uses to be opportunistic during market sell-offs, McDevitt says. Its expenses are low, at 0.8 percent. Eight managers each run a portion of the fund independently, with the aim of keeping investments diversified across sectors and markets. "The fund has a very experienced management team and a great investment culture. They're one of the best funds out there," McDevitt says.
Longleaf Partners International (LLINX): This fund has a history of strong performance and ranks in the top 3 percent of its foreign large-value category over the past decade. This value fund's managers invest in companies that are in some type of financial trouble or are overlooked, then hold on to them for the long run, says Gregg Wolper, a Morningstar senior fund analyst. The fund has a concentrated portfolio of about 20 stocks. It does not have very broad country exposure, as management does not focus on country or sector weightings. Instead, the managers base stock selection on company-by-company analysis, Wolper says. Japan accounts for the fund's largest country weighting, at 26 percent. The fund will also own companies within emerging markets. Longleaf is a bit pricey: At 1.6 percent, its expense ratio is above average for its category. In September 2009, the fund announced that it was allowing its currency hedging to the U.S. dollar to expire, and it will be completely unhedged by mid-2010. "When foreign currencies rise in the future, this fund's returns will get that boost, which is what has been happening for the past few years," Wolper says. When investing in this fund, it is important to have a long-term horizon, says McDevitt, because the fund will perform differently from the market at times because of management's strong conviction and concentrated portfolio. "But as you can see with their 10-year record, they've made it pay off over the long term," McDevitt says.
Scout International (UMBWX): Manager James Moffett focuses on companies with strong balance sheets and the potential for long-term growth. Moffett has managed the fund since its 1993 inception, and his portfolio's broad country exposure shows that he is willing to stray from the MSCI EAFE index's country weightings, Wolper says. The fund's largest country weightings are in Japan, Switzerland, and the United Kingdom. The fund invests about 10 percent of its portfolio in companies in emerging-markets countries, which include Brazil, Mexico, and Israel, Wolper says. It ranks in the eighth percentile in its large-blend category over the past decade. Moffett limits the fund's risk through broad diversification and holding on to stocks for the long term. Scout's 1.02 percent expense ratio is below average for its category.
Thornburg International Value (TGVAX): This fund ranks in the sixth percentile of its foreign large-blend category over the past decade. Management focuses on three types of stocks: basic value names, consistent earners (such as blue-chip growth stocks), and emerging growth companies (those that are leaders in their industries), and it invests across the spectrum of sectors, says William Rocco, a senior fund analyst at Morningstar. The fund holds an above-average stake in emerging markets (18 percent as of the end of October 2009). The fund has a relatively compact portfolio of about 60 holdings. The fund's annual fees are 1.32 percent, which is average for its category. "It's a very good fund, and you're going to get wide-ranging exposure with a strong long-term performance," Rocco says.
Tweedy, Browne Global Value (TBGVX): This fund differs from most international stock funds in that it hedges its currency to the U.S. dollar, which is a rarity among international equity funds, says Bridget Hughes, the associate director of fund analysis at Morningstar. It has a broadly diversified portfolio with about 100 stocks, and it invests in high-quality companies with strong balance sheets. Management looks for cheap stocks, evaluating companies' cash flow and book value. It invests across the market-cap spectrum, with limited exposure to emerging markets. The fund's willingness to hold cash, which made up about 8 percent of assets recently, has kept its volatility low over the years, Hughes says. Its returns over the past decade place it in the 11th percentile of its large-value category. The fund tends to outperform its peers during "rough and tumble" markets, such as 2001 and 2008 but tends to lag during market rallies, she says. The fund's expense ratio of 1.4 percent is average for its category. "This is a stable fund," Hughes says. "The only requirement is that you have a lot of patience because it can take a full market cycle to recognize the benefits of the fund."