Many investors with an America First mentality need to expand their horizons.
"A lot of investors don't have enough exposure to international markets, which can cut down on volatility and improve long-term returns," said Ibbotson Associates' Peng Chen. "The U.S. is the largest stock market, but more than 50% of the global equity market is in foreign stocks."
While globalization has meant foreign markets aren't the great diversifiers they once were -- increasingly, U.S. and overseas markets move in tandem -- overseas funds still deserve a prominent place in the long-term investor's portfolio.
How prominent? "Investors should have up to 25% in international assets, depending on the risk level of the client," says Mitchel Shapiro, certified financial planner and president of Maryland-based Shapiro Financial Services.
With that in mind, this week's Five Funds is devoted to suggesting five superlative foreign offerings. The funds run the gamut from deep value to fairly aggressive growth, but they all share key traits: great managers and returns that far outdistance peers over the long haul.
Any of these five offerings, depending on an investor's risk level, have proven solid, foreign representatives in a diversified portfolio.
(SGOIX) - Get Report 1. First Eagle Overseas
Jean-Marie Eveillard's First Eagle Overseas fund is first on our Five Funds list because it's first on just about every performance list for foreign stock funds. The fund's one- and three-year returns -- 5.06% and 7.34%, respectively -- rank in the top 1% of all overseas funds. Its five-year average annual return of 9.51% places the fund in the top 2% of its peers, according to Morningstar.
And Eveillard is no flash in the pan. The Frenchman has been investing overseas for more than two decades, racking up impressive long-term performance. First Eagle Overseas, which he has run since the fund's 1993 inception, hunts for stocks in all corners of the globe and mainly sticks to the smaller fry; 60% of the companies in the fund are micro-cap or small-cap, and the remaining holdings are mostly mid-cap stocks.
First Eagle Overseas also applies a value approach, based on the tenets on Benjamin Graham and Warren Buffett. Lately, he is finding good values in Japan, which at 21% of total assets is the fund's largest country exposure. He also remains bullish on gold prospecting -- he runs a phenomenal gold fund as well -- especially
, which turns up in the Overseas fund.
First Eagle is a worthy core overseas fund, but because of its small-cap bent it doesn't offer one-stop shopping for international stocks of all sizes. But Eveillard is a one-of-a-kind manager, who unearths great companies where others may not tread. With its great returns, outstanding manager and low costs (an expense ratio of 1.15%), First Eagle Overseas is a worthwhile choice.
For more on Eveillard, please read last week's interview,
First Eagle's Eveillard Explains Why He Likes Tyco and Gold.
(AEPGX) - Get Report 2. American Funds EuroPacific
Here's a good offering for the individual who does want one-stop, big-cap shopping in an overseas fund. The $24.25 billion-in-assets American Funds EuroPacific is dirt cheap. With a 0.88% expense ratio compared with the average 1.56%, the only cheaper route might be an index fund. And EuroPacific has outperformed its benchmark MSCI-EAFE index over one-, three-, five- and 10-year periods. Its five-year average annual return of 2.05% beats 85% of all overseas funds, and its 10-year return of 7.61% is in the top 7% of its peers.
How does the fund do it? The five-person management team, with an average tenure of more than 10 years, hunts for the best picks among the biggest international companies, with a dollop of mid-cap companies thrown in among the fund's roughly 200 equities for good measure. The skippers prefer finding good growth opportunities at a reasonable price (they dig into the deep-value bin as well) and keeping turnover low. Recently the managers have been beefing up their stakes in companies such as
One of American Funds EuroPacific's strongest selling points is its consistency. It only has one year in the past decade -- 2000 -- when returns weren't in the top 36% of its peers.
Caveat emptor: This fund's share classes carry a load, or sales charge. But investors may bypass the charge if they buy with a broker. Plus, if you're looking for one overseas fund to buy and hold, American Funds EuroPacific is worth the 1% back-end load the C shares charge.
Oh, and don't let the "American" moniker scare you away -- this firm has been investing overseas for a long time. In fact, it created the original benchmark EAFE index (now known as MSCI-EAFE -- short for Morgan Stanley Capital International-Europe, Australasia and the Far East) that is now the standard measuring stick for international performance.
(TBGVX) - Get Report 3. Tweedy, Browne Global Value
Tweedy, Browne Global Value is the closest thing an investor can come to having Warren Buffett manage an overseas portfolio. In his afterword to Benjamin Graham's
The Intelligent Investor
, the Sage of Omaha expounds on the virtues -- and extols the outstanding returns during the dreary 1968-1982 bear market -- of the fellow Graham & Doddsvilleans at Tweedy Browne.
Global Value's three skippers -- Christopher Browne, William Browne and John Spears, all at the helm since the fund's June 1993 inception -- are purists about buying good companies of any size whose stocks are trading at a discount, and then letting them ride. The fund's annual turnover is a mere 7%.
The strategy has paid off: The fund's three-year average annual return of negative 5.24% and five-year average annual return of 0.96% place it in the top 3% and 6% of the category, respectively. It also helps keep the expense ratio at a below-average 1.37%.
The $3.92 billion fund, unlike many other overseas funds, hedges its currency bets with the dollar, so it doesn't benefit from the recently weakening dollar. However, the managers believe the hedge makes the fund less volatile.
If great managers, an excellent long-term record and low costs aren't enough of a sell, another primary benefit of Global Value is its low correlation with the
-- the solid diversification it affords makes it a worthy overseas fund.
(WBIGX) - Get Report 4. William Blair International Growth
For investors looking for a strong growth offering overseas, the $765 million William Blair International Growth fund is a great choice.
Manager George Greig, at the helm since July 1996, doesn't shy away from risk in his disciplined approach to stock-picking, but the risks have paid off on the reward side of the equation. The fund's five-year average annual return is 4.18%, beating 97% of its peers, while the 10-year return of 8.89% a year beats 96% of all overseas funds. The fund's expense ratio of 1.6% runs a little higher than the average peer, in part because the fund's turnover -- at 112% a year -- is higher than average as well.
The fund, which has about 60% of its assets in mid-cap stocks, doesn't shy away from tech stocks such as France's
and Indian software company
. Greig has managed the whipsaw overseas markets adroitly the past five years, finishing in the top 37% -- and usually higher -- every year since 1999.
For the proverbial widows and orphans investors, this isn't the optimal overseas fund. But if an investor has a long time horizon and is comfortable going a little further out on the risk side of the equation, William Blair International Growth is a solid bet.
(OAKIX) - Get Report 5. Oakmark International
Rounding out our Five Funds is another great value-oriented offering, the $1.66 billion Oakmark International fund.
David Herro, at the helm since September 1992, and Michael Welsh, co-manager since November 1995, hunt for deep-value picks and aren't afraid to make bigger bets on companies such as
and Vivendi in the fund, which holds about 50 stocks.
Although the fund has taken it on the chin so far in 2003 -- losing 9.5%, according to Morningstar -- Oakmark International's three-year (-3.89%), five-year (-0.79%) and 10-year (7.32%) record ranks in the top 9% of all overseas funds. With a proven fund like Oakmark, investors would be prudent to look at the long-term performance and not fret about short-term volatility.
The fund sports a below-average expense ratio of 1.3%.
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