The Daily Screen: The Best Foreign Funds

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So much for the grass being greener.

As bad as it's been for U.S. stock funds this year, on average, foreign stock funds have been hit even harder. A steep selloff among tech and telecom stocks and a sagging euro have hurt foreign stocks and funds. A year like this one probably sours some investors on the classic argument for diversifying a U.S. stock portfolio with foreign holdings. After all, the average foreign stock fund is down 18%, more than double the S&P 500's losses. And it trails the S&P 500 over the last five- and 10-year periods, too.

Foreign Fumbling Foreign funds just haven't kept up with the U.S. markets
	Avg. Foreign Fund	S&P 500
YTD Return	-18%	-8.2%
1-Year Return	-9.1	-4.6
5-Year Return	9.2	19
10-Year Return	9.4	18.1
Source: Morningstar. Annualized performance figures through Dec. 1.

Then again, there is still good reason to keep foreign stocks in the fold. Just a few weeks ago, the Fund Junkie column showed that over the long term, including foreign stocks in a U.S. portfolio will boost returns while actually reducing volatility. If your foreign exposure is nil or less than 10% and you're intrigued, we've done a little shopping for you. We've screened the 335-fund category for those funds that beat their average peer over the past one- and three-year periods. Some 100 funds made the cut; here's a top-10 list ranked by their one-year returns.

Leading Foreign Funds These funds have bested their peers during the past few years
Fund	1-Year Return	3-Year Annualized
(IYSAX)Ivy International Small Companies A	20.2%	15%
(BIIEX)Brandes International Equity	15.8	22.9
MFS International New Discovery A	14.7	25.4
(OAKIX)Oakmark International	12.9	10.4
(EMIEX)Nations International Value A	12.5	20.1
(PTSCX)Pictet International Small Companies	12.5	24.2
(BREAX)BlackRock International Small Cap Eq Inv A	11.6	36
(GMOCX)GMO Currency Hedged International Core	11.6	12.8
(NIVAX)Pilgrim International Value A	10.6	19.6
(SGOVX)First Eagle SoGen Overseas A	10.3	11.8
Avg. Foreign fund	-9.1	9.7
S&P 500	-4.6	13.3
Source: Morningstar. Annualized performance figures through Dec. 1.

As you can tell from their names, many of the funds that made our top-10 list did so by focusing on small-cap stocks. As in the U.S., small- and mid-cap stocks tended to weather this year's storm better than big caps. While small-caps can offer more diversification because they're often less connected to global markets, they do typically entail more risk than stocks of larger, more established companies.

If you're interested in foreign small-cap exposure, there are several such funds on our list. An intriguing possibility you may not have heard of is the broker-sold (SGOVX)First Eagle SoGen Overseas. Jean-Marie Eveillard and co-manager Charles de Vaulx have held the reins since the fund's 1993 inception.

The pair favor low-priced small- and mid-cap stocks, and their price-conscious style has led to less volatility than their average peer without hurting returns. The fund's 11.3%, five-year annualized return beats 75% of its peers, and even in this tough year, it's above water with a 3.5% gain.

Because foreign markets can entail greater volatility than the U.S. market, it's often a good idea to look at value-oriented foreign funds. Because they're essentially bargain hunters, they can post solid returns without focusing on pricey stocks, which often lead to hefty helpings of risk.

If you're looking for a price-conscious fund that spreads its assets more widely among small-, mid- and large-caps, check out the no-load (OAKIX)Oakmark International fund. David Herro and Michael Welsh have run the fund since 1995, and they only buy stocks they think are trading well below their value.

That thoughtful approach has kept the fund ahead of at least 65% of its peers over the past one-, three- and five-year time periods.

For a large-cap fund on our list, check out the broker-sold (NIVAX)Pilgrim International Value or broker-sold (EMIEX)Nations International Value. Both funds are run by a team of managers at Brandes Investment Partners. Over time, they've focused on stocks that look cheap but balanced this moderate approach with a willingness to dabble in emerging markets. Both funds have managed to beat their peers over time, with less volatility.

If you're wondering which stocks propelled these leading funds, we've looked into that for you. We screened the leading funds portfolios to develop a list of their cumulative top-10 holdings. Because foreign funds have a world of stocks to choose from, there isn't a ton of consensus here, but it's an intriguing list nonetheless.

Under the Hood The stocks with the biggest weighting in the combined portfolios of the 10 above funds
Stock	Weighting in Top-10 Funds	Number of Top-10 Funds Owning the Stock
Diageo(DEO)	1%	3
Unilever(UL)	0.9	4
Mitsubishi Heavy Industrials	0.8	4
Reckitt Benckiser (RKBKF:OTC BB)	0.7	4
Allied Zurich (ADZHY:OTC BB ADR)	0.7	3
Den Danske Bk (DNSKY:OTC BB ADR)	0.7	3
City e-Solutions (CTYSF:OTC BB)	0.7	1
Metso(MX)	0.7	2
Alcatel(ALA)	0.6	2
Buderus	0.6	3
Source: Morningstar. Holdings as of funds' most recent portfolio reports.

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