International Discovery: "Less-Traveled" Areas
08/11/2016 10:00 am EST
Our latest featured fund recommendation is about as contrarian as you can get right now, notes Tim Begany in Personal Finance.
We think diversification into underperforming assets is particularly smart right now given the US stock market has roughly tripled from Great Recession lows.
To juice your portfolio, you’ll need to diversify into less traveled areas, such as foreign small- and mid-cap growth. Like investing legend Warren Buffett, we’ll go where most investors won’t.
That is why we’re adding T. Rowe Price International Discovery (PRIDX) to our model Fund Portfolio.
Justin Thomson, lead manager since the fund’s 1998 inception, favors two widely overlooked asset classes: foreign small- and mid-cap growth stocks.
PRIDX consistently outperforms here, with three-, five- and 10-year track records that beat 81%, 83% and 87% of peers, respectively.
Fund returns during those periods were an average annualized 8.6%, 6.5% and 6.3%, respectively.
PRIDX also offers excellent diversification, often owning more than 200 stocks. Plus, most fund holdings are local enterprises that are cushioned better from shocks to financial markets.
Thomson follows a bottom-up investing process that starts with specific companies rather than countries or economic sectors.
Although he strives for growth, Thomson is value conscious and favors stocks selling at low prices relative to projected profits, current cash flow or the value of company assets.
By region, Thomson’s bottom-up approach results in a 44% allocation to developed areas of Western Europe and 23% of assets in Japan.
The fund also makes small but meaningful bets on Spain, Switzerland and South Korea. It also allocates 21% of assets—about twice the peer group average—to emerging markets.
While on the higher side for mutual funds in general, PRIDX’s 1.2% expense ratio is competitive for an international equity offering.
Because it emphasizes growth-oriented stocks, PRIDX wouldn’t be expected to yield much—and it doesn’t, just 0.7%. But we do see it continuing to produce category-leading total returns.
By Tim Begany, Editor in Personal Finance