Diversity helps, but world-stock funds aren't faring well

Some flowers stand out amid the weeds, however

Dollars & Sense

July 14, 2002|By Brian Portnoy | Brian Portnoy,MORNINGSTAR.COM

Diversity has salvaged some of the world-stock crowd, but the category on the whole still lacks broad appeal.

World-stock funds can't all be painted with the same brush. Even though the average offering has lost 8.6 percent for the year through June 27, numerous offerings have posted attractive numbers. The market's preference for smaller, value-oriented fare has lifted Polaris Global Value and Templeton Global Smaller Companies to double-digit gains.

Most of the category hasn't fared that well. Large-cap funds that own financials such as AIG and Citigroup, tech stocks such as Microsoft and Nokia, drug companies such as Merck and Astra Zeneca, and virtually anything telecom-related have struggled the most. Also, Tyco, previously a favorite of world-stock managers, has weighed heavily on Putnam Global Equity and others.

At least the diversification benefits of the category look a bit more robust recently. With the decline in the dollar and the relative outperformance of foreign markets, many world-stock funds have outperformed core U.S. equity offerings. The average large-blend fund has dipped 13 percent this year, so at least the average global vehicle has lost less.

That said, the world-stock bunch has not typically offered investors much diversification, especially considering how the performance of large-cap stocks in many globally organized industries such as technology has increasingly moved in sync.

There are flowers that stand out from the weeds, including our four Fund Analyst Picks. Generally, investors will want to closely examine if - and how - a particular world-stock fund fits into a broader portfolio.

American Funds New Perspective A:

This is one of the few world-stock offerings that stacks up as core-holding material. Its focus on names such as AOL Time Warner, Pfizer and Vodafone Airtouch gives investors exposure to global market leaders. It invests primarily in growth-leaning companies, but the management team's attention to price multiples, a broadly diversified portfolio and a comparatively high cash stake have kept volatility in check. Its long-term returns are the category's best, thanks to consistent outperformance rather than the occasional off-the-charts run.

Oppenheimer Global A:

Manager Bill Wilby has more than earned his place among the group's finest. Since late 1992, his fund has far outpaced the average rival. Theme-based, growth-oriented stock-picking has been the key to such success. New technologies, mass affluence and the aging population are among the winning themes. Wilby doesn't ignore risk, though. His move out of high-priced tech stocks in early 2000 was spot-on, and the fund generally boasts below-average volatility. The fund's healthy dose of mid-caps has also distinguished it from the pack.

Scudder Global Discovery A:

This fund is distinguished from our other picks by its focus on smaller companies. Add manager Gerald Moran's penchant for fast growers and this offering ranks as one of the category's more volatile choices. So far, its risks have been worth it. However, an inability to weather the market correction recently highlights the fund's downside potential, so it's best paired with a more stable domestic large-cap fund.

Van Kampen Global Value Equity A:

A tilt toward value stocks has aided in this fund's recent buoyancy. It has held up especially well during the protracted market decline; its near 11 percent gain in 2000 was particularly uplifting. But over the long haul its team of managers has shown an ability to excel in various markets. (Manager Frances Campion also heads 9-year-old Morgan Stanley Global Value Equity, which has very good marks but a $500,000 minimum.) The fund's avoidance of pricey growth stocks has not only saved shareholders from substantial losses lately, but has also made for a relatively smooth ride. The one exception took place in 1999, when the fund's value discipline caused it to lag during the tech and telecom-led rally.

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