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 ina U.S. stock portfolio can boost growth, while lowering its risk, because foreign markets can move in different cycles than U.S. stocks.
That'sheld 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 thesishasn'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
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 thattopped their average peer over the past one, three, and five years with thesame manager at the helm, using data from Chicago research houseMorningstar. Then we tossed out any funds that are closed to newinvestors, carry a steep investment minimum or have above-average annual expenses.
Fewer than 10% of the foreign funds out there made the cut. We rankedthem by their average annual gain over the past five years to cobbletogether a top 10 list. Let's check them out and then look at acouple of funds that deserve an honorable mention.
Like most foreign funds, those on our list have typically focusedmainly 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 thisyear.
A Trio for Value
Among the value funds on our list, a trio illustrate a range of strategies:
Tweedy Browne Global Value,
First Eagle SoGen Overseas and
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 atleast 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 betsdifferently.
The no-load Tweedy Browne fund, run by John Spears along with brothersChris 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. Andthe broker-sold First Eagle SoGen Overseas fund, run by Charles de Vaulxand 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 thefolks at First Eagle SoGen got the nod from
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
William Blair International Growth fund, run by W. George Greig, and
Sextant International, where Nicholas Kaiser calls the shots.
Rather than bet the farm on tech stocks, like most of their growthypeers, each fund looks for companies in any sector with reasonablevaluations 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.
Another solid growth choice is the massive and broker-sold $29 billion
EuroPacific Growth fund, run by a tenured team at quiet giant
.The fund's mountainous assets are divvied up among its managers, whofocus on companies with solid earnings growth and modest valuations -- aclassic 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 itspeers.
Why isn't it on our list? The fund has no manager tenure listed inMorningstar'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
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.
Ian McDonald writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
firstname.lastname@example.org, but he cannot give specific financial advice.