Well-performing foreign funds hard to locate, but out there

Dollars & Sense

September 01, 2002|By William Samuel Rocco | William Samuel Rocco,MORNINGSTAR.COM

The continuing sell-off in the world's stock markets has hit foreign funds even harder than domestic offerings. While the typical domestic-equity offering has shed about one-third of its value since the current downturn began in the spring of 2000, the average overseas fund has lost nearly 45 percent of its value.

Of course, foreign funds can't stay in the gutter forever. Not only are there many good bargains abroad - the price multiples of foreign funds are 15 percent to 20 percent lower than those of domestic offerings on average - but there is also reason to believe the worst might be over in international markets. Overseas funds, in fact, have held up significantly better than domestic-equity offerings in recent months and for the year to date.

Therefore, investors who have less international exposure than they want should consider addressing that sooner rather than later. Those investors, no doubt, would prefer a first-rate fund that has proved its ability to rebound from a sell-off.

Finding such funds is much easier said than done, though. Only 116 of the 370 foreign funds were around for 1994's mild slump; only 60 of them were around for 1992's moderate correction; and only 41 of them were around for 1990's double-digit downturn. The vast majority of that 41 have disappointed after at least one of the past sell-offs or have uninspiring long-term records. And most of those that have prospered after the past downturns and over time have changed managers since 1990 or are inaccessible to individual investors. In other words, few funds can clear the hurdles in this competition.

In fact, only two retail foreign funds have thrived after the 1990, 1992 and 1994 sell-offs; have earned strong long-term records; and have stuck with the management responsible for their considerable past success: American Funds EuroPacific Growth (AEPGX) and Harbor International (HAINX).

American Funds EuroPacific Growth: This fund posted a top-quartile 19 percent gain in 1991, and though its 36 percent return in 1993 was merely average, it also earned superior results in 1995. Its 10-year returns rank among the foreign category's best, and it has suffered only limited volatility along the way. The fund's deep and experienced management team has achieved this enviable record with a buy-and-hold, growth-at-a-reasonable-price strategy. A low expense ratio rounds out its appeal.

Harbor International: Hakan Castegren, who has run this offering since its 1987 inception, focuses on undervalued blue chips with strong franchises or assets. He has executed his value style deftly after the three early-1990s corrections and over time. Indeed, the fund posted top-quartile gains in 1991, 1993 and 1995, and it has gained 10 percent per year over the past decade, while the typical foreign offering has returned 5 percent per annum during that period. Volatility hasn't been a problem here. And the fund boasts a fetching expense ratio.

Prospective foreign-fund investors might also want to check out another fund that came close to meeting our demanding criteria, Preferred International Value (PFIFX). It opened in mid-1992, so it wasn't around for the 1990 slump and its immediate aftermath. However, it thrived after the 1992 sell-off and posted solid results after the 1994 slump. And it has a terrific long-term, risk/reward profile.

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