The Big Screen: Foreign Funds That Are Worth the Trip

Owning a foreign-stock fund over the past few years has felt a lot like owning a three-bedroom apartment in downtown Jalalabad.

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The argument for owning foreign funds is that a 10% or 20% position in a U.S. stock portfolio can boost growth, while lowering its risk, because foreign markets can move in different cycles than U.S. stocks.

That's held true over the past 20 years, but thanks to a spate of currency crises, a strong dollar and a sagging global economy, however, the growth part of that thesis hasn't really panned out recently. The average foreign-stock fund's 1.9% annualized gain over the past five years trails every single U.S. stock-fund category.

The diversification argument looks weak, too. Foreign-stock funds and the S&P 500 mainly rise and fall together, though to different degrees, over the past decade.

Despite this blue period, we think foreign funds are still worth owning. This week's Big Screen has found some that managed to post solid returns -- implying that they could sparkle when things turn up.

To find some solid choices, we sifted the category for funds that topped their average peer over the past one, three, and five years with the same manager at the helm, using data from Chicago research house Morningstar. Then we tossed out any funds that are closed to new investors, carry a steep investment minimum or have above-average annual expenses.

Fewer than 10% of the foreign funds out there made the cut. We ranked them by their average annual gain over the past five years to cobble together a top 10 list. Let's check them out and then look at a couple of funds that deserve an honorable mention.

Have Talent, Will Travel These foreign funds topped our screen
Foreign Fund	Five-Year Annualized Return	One-Year Return
(BJBIX)Julius Baer International	13.2%	-17.6%
(WBIGX)William Blair International Growth	12.8	-16.3
(TBGVX)Tweedy Browne Global Value	12.5	-3.3
(ARTIX)Artisan International	11.7	-18.6
(NIVAX)Pilgrim International Value	11.3	-15.9
(SGOVX)First Eagle SoGen Overseas	9.3	4.8
(UMBWX)UMB Scout Worldwide	7.6	-14.4
(OAKIX)Oakmark International	7	-5.5
(RINEX)HSBC Investor International	6.1	-22.2
(SSIFX)Sextant International	5.9	-17.1
Avg. Foreign-Stock Fund	1.9	-23.6
Avg. U.S. Stock Fund	7.9	-14.1
Source: Morningstar. Returns through Jan. 28.

Like most foreign funds, those on our list have typically focused mainly on Europe and spread most of their money among other developed markets. That said, these funds have taken varying routes to beating their peers over the past five years.

Some have blended the bargain-hunting value and more aggressive growth styles. Two examples are chart-topper Julius Baer International, run by Richard Pell and Rudolph Riad-Younes since 1995, and Artisan International, run by Mark Yockey since 1995.

Both no-load funds have topped their average peer in each of the past five years, which is no small feat because that period covers the inflation of the tech-sector bubble worldwide and its pop in March 2000.

Artisan's Yockey won Morningstar's coveted foreign-fund manager of the year award in 1998, while Pell and Riad-Younes were finalists for the honor this year.

A Trio for Value

Among the value funds on our list, a trio illustrate a range of strategies: (TBGVX)Tweedy Browne Global Value, (SGOVX)First Eagle SoGen Overseas and (OAKIX)Oakmark International.

Each fund's management team shops for stocks of companies trading well below what they think they're worth and that have paid off. All three funds top at least 90% of their peers over the past one, three and five years, while also beating the S&P 500 over the past three years. Despite their similar track record and strategy, however, the funds have spread their bets differently.

The no-load Tweedy Browne fund, run by John Spears along with brothers Chris and William Browne, keeps about a third of its assets in small-, mid-, and large-cap stocks. David Herro and Michael Welsh, co-managers of the no-load Oakmark International fund, tend to focus on mid-cap stocks. And the broker-sold First Eagle SoGen Overseas fund, run by Charles de Vaulx and Jean-Marie Eveillard, plows some 60% of its money into small-cap stocks.

The Tweedy Browne fund's team won Morningstar's manager of the year award in 2000, while the folks at First Eagle SoGen got the nod from TheStreet.com and Morningstar this year.

A Growth Duo

Given the global drubbing absorbed by growth managers' favorite sectors, technology and telecommunications, you might think none would make our cut, but two did: the (WBIGX)William Blair International Growth fund, run by W. George Greig, and (SSIFX)Sextant International, where Nicholas Kaiser calls the shots.

Rather than bet the farm on tech stocks, like most of their growthy peers, each fund looks for companies in any sector with reasonable valuations and solid earnings growth in comparison with their peers. Greig's fund has topped its average peer in four of the past five years, while Kaiser's more obscure fund has beaten his average competitor in five of the past six years.

Honorable Mentions

Another solid growth choice is the massive and broker-sold $29 billion (AEPGX)EuroPacific Growth fund, run by a tenured team at quiet giant American Funds. The fund's mountainous assets are divvied up among its managers, who focus on companies with solid earnings growth and modest valuations -- a classic growth-at-the-right-price approach. That strategy has left the fund with broad sector and country diversification, as well as solid returns.

The fund has beaten its average peer in eight of the past 10 years, and its 10.4% annualized gain over the past decade tops a whopping 95% of its peers.

Why isn't it on our list? The fund has no manager tenure listed in Morningstar's database, though two team members have been in place since the fund's 1984 launch.

Index-fund fans are no doubt disappointed that one didn't turn up on our list. Usually, index funds lag behind active managers in broad categories with many securities to choose from, like small-cap funds or foreign funds.

That said, index funds in the diversified foreign-stock fund bin have been held back unfairly. They track the Morgan Stanley Capital International Europe Asia Far East index, which had a big bet on the Japanese market. The index's structure is being adjusted, which should help funds that track it.

One index fund you might consider is the no-load Vanguard Total International Stock Index fund, which spreads its money among three index funds tracking European, Pacific and emerging-markets indices. If you're looking for an exchange-traded fund that tracks the Morgan Stanley index, check out the iShares MSCI EAFE Index (EFA) fund. Both funds are cheap, carrying a 0.35% annual expense ratio compared with 1.64% for their average peer.

Maybe the only silver lining in foreign funds' trials over the past five years is that their difficulties make it easier to sort out which deserve your money. These funds do.

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