Foreign Funds for Battered Investors With Wanderlust

The grass is always greener, and with the U.S. economy and market looking more than a little wobbly, you might find yourself sniffing around funds that invest overseas.

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Of course, it's not as if foreign markets rise when the U.S. market falls and vice versa. Thanks to corporate globalization and the dominant role of the U.S. economy and markets on the global stage, it's actually rare that a cold for the U.S. market doesn't give overseas stocks pneumonia. Last year, for instance, big-cap U.S. growth funds lost about 14% and the average foreign fund tumbled 15.7%, according to Morningstar. And foreign markets can involve greater currency and political risks than U.S. stocks. Still, there is an advantage to spreading your assets abroad. And given that many market watchers are seeing some stellar opportunities abroad in 2001, it may be a good time to get serious.

The classic argument for investing in foreign funds is that they give you exposure to growth opportunities in markets that tend to move in slightly different cycles than U.S. stocks. The idea is that adding a modest degree of international stock exposure to a domestic portfolio boosts returns slightly, while also reducing volatility since it isn't all riding on one market. (TSC walked through this argument in a recent column.)

"Sometimes when the U.S. market zigs, the foreign markets zag. They're not negatively correlated, but there's diversification there," said Morningstar senior fund analyst Scott Cooley. "It just makes sense to put at least a modest amount of your assets overseas, like 20%-25%, for a fairly aggressive long-term investor."

If you've ignored foreign funds until now, the Big Screen has done a little digging to get you started. We've screened the 339-fund category to single out those funds that beat their average peer over the last one-, three- and five-year periods with the same manager at the helm, according to Morningstar. Then we ranked those 20 or so funds by their five-year annualized returns, whittling the list down to the 10 funds listed in the chart below.

Leading Foreign Funds These funds have topped their peers while keeping a steady hand at the helm.
Fund	5-Year Return	3-Year Annualized	1-Year Annualized	Manager Tenure
(ARTIX)Artisan International	24.2%	28.8%	-8.3%	5 years
(BJBIX)Julius Baer International	22	26.6	-8.6	5
(NIVAX)Pilgrim International Value	18.6	20.4	-4.9	5
(TBGVX)Tweedy, Browne Global Value	17.6	15.5	-12.3	7
(TWIEX)American Century Intl Growth	17	17.7	-14.5	5
(FDIVX)Fidelity Diversified Intl	15.6	15.9	-7.9	9
(MIEDX)MassMutual Instl Intl Equity	15.2	14.6	-8.4	6
(UMBWX)UMB Scout WorldWide	14.6	12.5	-5.4	7
(OAKIX)Oakmark International	13.3	13.5	13.6	6
(LEXIX)Pilgrim International	12.5	17	-8.6	5
Avg. Foreign fund	8.9	10	-15.1	3.3
S&P 500	18.5	12.5	-3.6	-
Source: Morningstar. Annualized performance figures through Jan. 5.

Foreign fund haven't been all too popular in recent years, due mainly to the U.S. market's bull run. Over the last five years, the average foreign fund has managed to post an 8.9% annualized return, compared with 18.5% for the S&P 500. But there are some solid funds out there, like those we turned up.

Foreign Fund Funk The average foreign fund has lagged behind the broader market in the U.S.

Source: Morningstar. Annualized performance figures through Jan. 5.

The chart-topping, no-load (ARTIX)Artisan International fund has 1998 Morningstar Manager of the Year Mark Yockey at the helm. He's run the fund since its 1995 inception. His focus on companies with fast-growing earnings typically leads to big bets on the technology or telecommunications sectors, but he showed his versatility this year by shifting gears and raising his stake in the financial sector. At the end of November, financial stocks comprised about 30% of the fund.

Yockey's style has led to solid returns. The fund beats at least 75% of its peers over the last one-, three and five year periods, according to Morningstar. The fund's 24.2% five-year annualized return beats the S&P 500 by more than five percentage points and 98% of the fund's peers.

Versatility is also an important part of the no-load (BJBIX)Julius Baer International fund's success. Co-managers Rudolph-Riad Yonnes and Richard Pell, who've held the reins for five years, use different investment strategies in different regions. In Europe they look for companies benefiting from broad growth trends, in emerging markets they focus on stocks in countries with healthy economies, and in Japan they practice a blend of both methods.

Though it sounds complicated, it's worked out well. Like Yockey, the pair has managed to beat at least three-quarters of their peers over the last one-, three and five-year periods. Their 22% five-year annualized return beats 97% of peers.

For a slightly more price-conscious approach, check out the next two funds on the list: (NIVAX)Pilgrim International Value and (TBGVX)Tweedy, Browne Global Value.

In running the broker-sold Pilgrim fund, co-managers Jeffrey Busby and Charles Brandes shop for stocks that they believe are selling far below their actual worth. To find these bargains, the pair isn't afraid to buy stocks in emerging markets.

Despite dipping into those sometimes choppy waters, the fund has been less volatile than its average peer over the last three years. It also beats the S&P 500 and more than 90% of its peers over the last one-, three- and five-year periods. The fund's 20.4% three-year annualized return beats the S&P 500 by eight percentage points.

And you might know the no-load Tweedy, Browne Global Value fund's managers, Chris Browne, William Browne and John Spears, because they won Morningstar's 2000 Manager of the Year award for foreign funds this week.

The three focus strictly on stocks of companies they believe are trading below their private market value. They also aren't afraid to let cash mount up a bit if they're not finding ideas that match their criteria. Their style has led to less volatility than their average peer and higher returns. Over the last one-, three- and five-year periods, the fund beats at least 85% of its competitors.

If you're looking for another solid, price-conscious foreign fund, you might want to check out the no-load (OAKIX)Oakmark International fund, which also made our list. And if you're a die-hard index investor, take a look at the no-load (VGTSX)Vanguard Total International Stock fund, which divides its money between the Vanguard index funds tracking European stocks (60%), Pacific stocks (30%) and stocks in emerging markets (10%).

The fund hasn't wowed investors, its 8.4% three-year annualized return trails 60% of its peers, but if you prefer index funds it's a solid choice. Its 0.34% annual expense ratio is far lower than the average foreign fund's 1.7%.

Well, there you have it, a relatively short list of foreign funds for battered investors with wanderlust.

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