Foreign small-growth funds may again be ready to romp

Four come to mind as offering potential for prudent investors

Dollars & Sense

May 26, 2002|By William Samuel Rocco | William Samuel Rocco,MORNINGSTAR.COM

Don't overlook foreign small-growth funds if you're seeking some international pop.

Foreign small-value funds and emerging-markets offerings are all the rage these days with investors who want to add zing to their international exposure. The ample diversification value and considerable upside potential of these funds have been obvious lately.

Meanwhile, most foreign small-growth funds have been poor performers lately. They pay a lot of attention to up-and-coming tech and telecom stocks, and these issues, like larger computer and telephone stocks, have really struggled over the past couple of years. As a result, most of these funds plunged 15 percent in 2000 and 25 percent in 2001, and they've earned only limited gains this year.

However, foreign small-growth funds have ample upside potential of their own - many of them returned more than 100 percent in 1999 - and it often makes sense to consider funds after their style has been out of favor for some time. Such funds may not rebound for a while, of course, but you're likely getting their underlying stocks at good prices. What's more, there is not much risk that you're getting in at a short- to mid-term peak (as there may be with foreign small-value offerings these days).

Thus, we believe investors who are seeking to add spice to their international exposure should consider a foreign small-growth offering - provided they can handle significant volatility and have a long time horizon. And we think these four offerings deserve particular attention.

Driehaus International Discovery (DRIDX): This fund has parlayed an aggressive style into top-notch results. Managers Emery Brewer and Eric Ritter pursue companies with accelerating sales and earnings growth, and they readily consider emerging-markets issues and move at a frenetic pace. This explosive strategy produced a 214 percent gain in 1999's new-economy surge. But the fund is more than a rally star. It suffered relatively limited losses in both 2000 and 2001, and it has posted robust gains in this year's choppy climate. The fund isn't perfect, though. Its daring discipline comes with all kinds of risks. And its expense ratio is high, while its rapid turnover means it's best owned in a tax-deferred account.

Liberty Acorn International (ACINX): Though this fund was a mediocre performer relative to its small-growth peers in 2000 and 2001, it still has plenty of charms. Leah Zell, who has been at the helm since its late-1992 inception, is the longest-serving foreign small-growth manager as well as one of the most knowledgeable. Moreover, the fund has earned strong returns this year, and it has gained an impressive 11 percent per year since inception. And it has an expense ratio of just 1.05 percent. That said, this fund has a relatively hefty $1.7 billion asset base, so it's less nimble than many of its competitors and has more mid-cap exposure as well.

American Century International Opportunities (M$-FGBC): This fund opened only last June but it has a lot going for it. Lynnette Schroeder showed real talent for picking small-growth stocks overseas before taking the helm here. (She's partially responsible for Driehaus International Discovery's early success.) She's following the same momentum-oriented approach that American Century's other international offerings have used with great success to pick small caps as well as large caps. And the fund is committed to closing when it reaches $500 million in assets, which should keep it agile and focused on small firms. What's more, the fund suffered only minimal losses over the latter part of 2001, and it's up 14 percent this year.

Artisan International Small Cap (ARTJX): This is another young fund with a terrific pedigree. Mark Yockey, the longtime manager of Artisan International and Morningstar's 1998 International Manager of the Year, runs this offering using the same flexible growth discipline he uses at his other charge. This fund is also committed to closing when it hits $500 million in assets, so it should stay nimble and focused on small companies. It has gained an encouraging 10 percent thus far in 2002. Thus, though it's less than 6 months old, we think it's well worth a look.

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