U.S. News is releasing a series of stories highlighting top-rated mutual funds according to various categories. These funds have performed well over the long term, are rated highly among the industry's analysts, and have low minimum investment, making them accessible to all investors—big or small. This is the sixth piece in a series of stories highlighting 10 categories that make up U.S. News's 100 Best Mutual Funds for the Long Term.
Foreign large-blend funds, which provide broad exposure to markets outside of the United States, can be used as a core holding for the international side of your portfolio.
Despite some exposure to the rapidly growing emerging markets, many of these funds suffered the same fate as U.S. large-cap stock funds over the past decade. Two brutal recessions during the past decade took their toll on the returns of stock markets throughout the world. The average fund in the foreign large-cap blend category has returned an annualized 3 percent over the past 10 years. That's almost half of a percentage point lower than the broad MSCI EAFE Index, which measures developed markets in Europe and Asia, but still better than the returns of the U.S. large-cap stocks that make up the S&P 500 Index. The S&P 500 has returned an annualized 1 percent over the same time period.
When distinguishing between funds in this category, investors should be mindful of country exposure. Many foreign large-blend funds have large allocations to emerging markets stocks, which have generated much higher returns than their developed counterparts, but also come with higher volatility. Others funds in the category stick to developed markets in Western Europe, Canada, and Japan.
It's also worth noting that many foreign large-cap blend funds don't hedge their foreign currency exposure—meaning the stocks in their portfolios will be affected by changes in local currency. (The fluctuations of, say, the Euro and the Japanese yen, will impact the returns of these funds.) "If the dollar is weak … it can actually be better as far as your returns," says Morningstar senior fund analyst Gregg Wolper.
Going forward, Wolper says investors in these funds should keep an eye on the effects of the European debt crisis and the growth—or lack thereof—in China. "China's growth has been a great driver for many stocks around the world, not just in China, but in other emerging markets and in developed markets," he says. With that in mind, here are U.S. News's 10 best foreign large-cap blend funds for the long term.
Sextant International (symbol SSIFX). This fund is far from fully invested in the stock market, with more than 30 percent of its total assets residing in cash. A defensive position helped Sextant International during 2008, but the fund lagged somewhat in 2009 as market rallied. The portfolio contains 72 stocks, many of which are natural resource companies like Canadian mining company Teck, the fund's largest holding. Emerging markets stocks account for a quarter of the fund's assets. Its turnover ratio, which measures how often one stock is swapped out for another, is extremely low at 2 percent. Over the past 10 years, the fund has returned an annualized 7 percent. Its annual fees are 1.13 percent.
Fidelity Canada (FICDX). Manager Doug Lober invests at least 80 percent of the fund's assets solely in Canadian stocks or stocks tied to the Canadian economy. Because Canadian financial and natural resources stocks have performed well lately, the fund has blown its peers out of the water, returning an annualized 12 percent over the past decade. It has large holdings in financial, industrial, and energy companies, which all make up a large part of Canada's economy. Annual fees are 1.13 percent.
Ivy International Core Equity (IVIAX). Developed markets in Europe and Asia account for the bulk of this fund's assets, and only about 10 percent of the portfolio resides in emerging markets. The fund holds a mix of banks, telecom, and energy stocks, including large holdings in Credit Suisse, Vodafone, and Shell. Its turnover ratio is just under 100 percent—meaning that it generally replaces its entire portfolio once a year. The fund has gained an annualized 7 percent over the past 10 years and charges annual fees of 1.59 percent.
Vanguard International Growth (VWIGX). Most of this fund's assets are in developed markets, with about a quarter of the portfolio in emerging markets. Those emerging markets holdings were a drag on performance in 2008, but the fund rebounded dramatically in 2009, returning more than 40 percent. Among its largest holdings are Chinese Internet tycoon Baidu and Brazilian mining company Rio Tinto. Over the past 10 years, the fund has returned an annualized 5 percent. Its annual fees are 0.49 percent.
Manning & Napier World Opportunities (EXWAX). This fund's 9 percent annualized gain over the last decade ranks it near the top of its category, but what's more noteworthy is its history of guarding the downside—losing 20 percent less than its benchmark MSCI EAFE Index during market downturns, according to Morningstar. European stocks account for more than half of the fund's assets, and less than 10 percent of assets are in emerging markets. The fund invests in companies of all sizes. The average market capitalization of companies in its portfolio is $12 billion, compared with a category average of $30 billion. The fund's annual fees are 1.17 percent.
Scout International (UMBWX). James Moffett differs from other most fund managers in this category in that he invests in a handful of stocks in debt-ridden Eurozone countries like Greece. He also doesn't invest in China. About half the fund's assets are in developed Europe, and another 15 percent are in Japan. The fund's turnover ratio is only 12 percent. The fund has returned an annualized 7 percent over the past 10 years. Its annual fees are 0.97 percent.
Thornburg International Value (TGVAX). This fund is one of the most concentrated offerings on the list. It holds about 60 stocks from developed markets in the Americas, Asia, and Europe, and has an above-average allocation to emerging markets relative to the category. The fund's long-term results are impressive: Since its 1998 inception, it has posted an annualized 9 percent return, outperforming 166 of the 170 foreign large-cap funds that have been around that long, according to Morningstar. Top holdings include healthcare companies Novartis and Israel's Teva Pharmaceuticals. Its annual fees are 1.33 percent.
American Funds EuroPacific Growth (AEPGX). With almost 300 stocks in its portfolio, this fund is among the most diversified on the list. It also has a low turnover ratio of 26 percent. Management will invest at least 80 percent of the fund's holdings in Europe and Asia, according to the fund's prospectus. The fund is heavy on telecommunications and healthcare stocks, such as America Movil and Novartis. Over the past 10 years, the fund has returned an annualized 6 percent. Its annual fees are 0.85 percent.
Vanguard Total International Stock Index (VGTSX). Over the next few months, this index fund will begin tracking the MSCI All Country World ex-USA Investable Market Index (its former benchmark is the MSCI EAFE + Emerging Markets Index). Among the biggest changes: Canada will make up 8 percent of the index, and the fund will track close to 6,000 stocks, including some smaller companies. The fund has a rather large allocation to emerging markets stocks, which make up about 20 percent of total assets. The fund has returned an annualized 5 percent over the past 10 years and charges annual fees of 0.27 percent.
Vanguard Tax-Managed International (VTMGX). As its name suggests, the fund takes special care to minimize taxes. It's run like an index fund, but management will, at times, make changes for tax purposes. Management also trades infrequently to keep trading costs low. (The fund's turnover ratio is just 9 percent.) The portfolio is heavily weighted in Japan and developed countries in Europe. Over the past decade, the fund's 4 percent annualized return lagged its peers somewhat because of its lack of exposure to emerging markets. Its annual fees are 0.20 percent.
Corrected on 12/16/10: An earlier version of this story misstated the return of the average foreign large-blend fund. The return was a half of a percentage point lower than the MSCI EAFE Index.