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Six-Pack of Favorite Foreign Funds
01/02/2015 8:00 am EST
A well-diversified portfolio should include a sizable allocation to non-US stocks as well, explains Adam Zoll of Morningstar.com.
So we turn our sights to foreign funds that our analysts say are well positioned to outperform their peers over the long-term.
Active Foreign-Stock Funds
For US investors, buying foreign stocks can be particularly challenging given that many foreign companies may be unfamiliar to them.
Dodge & Cox International Stock (DODFX) essentially uses a standard value-investing approach but executes it with unusual dedication and patience. Its managers look for companies they consider undervalued versus their true long-range worth.
That often leads them to very unpopular stocks, such as major pharmaceutical firms when concerns about lackluster pipelines are rampant or individual companies are suffering from specific issues.
The managers at Manning & Napier World Opportunities (EXWAX) are not hesitant to stand apart from their benchmark or foreign large-blend peers. The portfolio shifts across regions, sectors, and market-cap levels.
Analysts identify firms that meet one of three profiles; industry-leading firms with sustainable advantages, stocks expected to emerge as industry leaders following a cyclical slump, and deep value opportunities set for a turnaround.
Some foreign-stock funds dabble in emerging-markets stocks, which tend to be more volatile but may offer more upside potential than those found in developed markets, especially if investors buy them when their prices are low.
American Funds New World (NEWFX) offers relatively low-risk exposure to emerging markets. Rather than being a pure play on emerging-markets equity, it often keeps about 40% of its assets invested in developed-markets stocks and 10% in emerging-markets debt.
Those two elements have made the fund far less volatile than most peers but without sacrificing too much of the upside. (This fund may carry a sales load.)
The managers of T. Rowe Price Emerging Markets Stock (PRMSX) use a sound, growth-oriented strategy that has a sensible mix of tame and bold traits, which results in a distinctive portfolio. They have a sizable and skilled support squad, which includes 26 emerging-markets stock analysts.
Foreign Small-Cap Funds
Many foreign-stock funds invest primarily in large-cap stocks. For added diversification, consider a quality foreign small- and mid-cap fund.
Managers Louis Mendes and Zach Egan at Columbia Acorn International (LAIAX) pursue fast-growing small- and mid-cap stocks and they do extensive research, pay attention to valuations, and move at a measured pace while doing so.
They will readily build distinctive stakes in individual countries and load up on stocks in the developing world as long as those issues meet their growth standards and various other criteria. (A no-load version of this fund is closed to most new investors, but a load version remains open.)
T. Rowe Price International Discovery (PRIDX) lead manager Justin Thomson and his co-managers focus on companies with market caps between $100 million and $3 billion that have compelling business models and the ability to generate returns above the cost of capital.
In particular, they focus on profitable growers that have expanding market shares, strong or improving pricing power and margins, high-quality income and balance sheets, and high returns on equity and invested capital.
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