If David Herro is right, this is a great time to buy foreign stocks and currencies.
"From a fundamental perspective, the dollar is overvalued vs. most currencies," says Herro, co-manager of Oakmark International. Herro cites purchasing power parities that indicate the dollar is "20 percent to 25 percent overvalued."
Herro says he can't predict when the dollar will turn, but he says the move could be a sharp one. "It's like a bunch of kindling just waiting for a match."
In extreme cases, Herro will hedge his exposure to foreign currency but now he feels "very good about buying foreign currencies."
What this means to fund investors is that unhedged foreign funds will outperform hedged foreign funds, if Herro is right. Even if he's only half-right and the dollar is flat for the next few years, it makes unhedged funds worth a second look.
Take out currency movements and unhedged funds' returns would look a lot better. Herro's Oakmark funds would be good candidates, naturally. In fact, there are so many good choices that I can limit my list below to just those who have won Morningstar's Manager of the Year award.
Artisan International: Manager Mark Yockey has had a great run here. This fund ranks in the top 2 percent of foreign funds over the past five years, thanks to his skilled growth-stock-picking. It's a bold fund with a turnover rate of 99 percent, but the tech meltdown didn't singe Yockey too badly.
Although the fund lost money last year and this year, it actually did far better than most foreign funds.
Harbor International: Talk about contrasts. Manager Hakan Castegren runs a low-turnover value style. Castegren is a patient player of restructuring plays - particularly European ones. He's got ING Group, ABN AMRO and Nestle in the current lineup. (Morningstar stock analyst David Kathman is a big believer in Nestle's turnaround, too.)
Despite the currency head- wind, this fund has outperformed its peer group over the trailing one-, three-, five- and 10-year periods.
Amazingly, Castegren used to manage Ivy International, too. But Ivy dumped him in May 2000 because he wouldn't reopen the fund. Since then, Ivy International has lagged behind Harbor International by 18 percentage points. Ivy International shareholders might want to send a big thank-you note to the bulldogs on Ivy International's board.
American Funds EuroPacific Growth: This is one of the safer bets among foreign funds. Not that it promises to go without losses. Last year's 18 percent loss makes that clear. However, with an entire crew of good managers and analysts behind this fund, it would take some doing to dampen this fund's long-term prospects.
In addition, its low expense ratio will give it a healthy long-term edge. The fund is allowed to hedge, but it's very rare for it to do so.