Three Foreign Funds Providing Shelter from the Storm
The strategies of these cautious funds are paying off in tough times.
There's no guarantee that strict-value funds will hold up better than rival portfolios when the market takes a dive. It's understandable, though, for shareholders to expect funds with caution built right into their DNA to provide a cushion when stocks are in a sharp decline.
That notion was put to the test when markets plummeted after reaching highs in early October 2007. No doubt investors in United States stock funds were taken by surprise. And the shock likely was even greater for shareholders of foreign-stock funds, who in recent years have become accustomed to outsized returns bolstered by soaring emerging markets and strong foreign-currency gains.
But most value funds didn't avoid the problems. In fact, the foreign small/mid-value category sank 18.4% in the five months from Oct. 9, 2007--the market peak--through March 10. The foreign large-value group dropped 15.5%. But shareholders of a few foreign-stock funds--mainly those that focus more than most rivals on limiting damage during market declines--have not had to endure such steep losses. It's encouraging that these funds delivered as intended to an impressive degree, even if they did land in the red.
A prime example is Third Avenue International Value (TAVIX). That fund posted a much milder-than-average loss during this five-month stretch, dropping 7.8%. The fund, managed by Amit Wadhwaney, uses the same strict discipline as the other Third Value funds at value-investing legend Marty Whitman's shop. One reason it held up well in the turmoil was its cash stake. Putting aside a significant amount of money isn't unusual for this fund--when Wadhwaney can't find enough securities that meet his standards, he doesn't feel compelled to fill the portfolio. It had roughly 15% of assets in cash during most of that period.
However, cash wasn't the whole story. The Third Avenue shop's core investment strategy is to focus on companies it considers safe as well as cheap, placing much importance on balance-sheet strength. That leads it to companies that the fund managers think can weather financial crises without having to tap the capital markets--the types of firms well-suited to hold up during a market slide fueled by credit worries. It's noteworthy that the fund also topped most rivals during the last bear market. (It arrived on the scene at the end of 2001, roughly in the middle of that deep and lengthy downturn of the early 2000s.)
Meanwhile, foreign small/mid-value rival First Eagle Overseas (SGOVX) performed even more impressively during the five-month period, holding its loss to 4.7%. The reasons are nearly the same. Lead manager Jean-Marie Eveillard has always been a cautious investor who doesn't hesitate to let cash sit on the sidelines when stocks seem expensive. So, this fund's cash stake--already quite large when he returned to take the helm of the fund from Charles de Vaulx, who departed in early 2007--was hefty enough during the downturn to provide some cushion.
In addition, First Eagle Overseas has long held a small stake in gold or gold-related holdings as an insurance policy against disruptions in the stock markets; that policy came in particularly handy during the recent turmoil, as gold's price soared. Like Third Avenue International Value, this fund also delivered during the 2000-03 bear market, posting solid gains when rivals were plummeting.
Another foreign fund that held up well recently isn't quite as focused on a deep-value approach as are Third Avenue and First Eagle. Even so, Matthews Asian Growth & Income's (MACSX) strategy likely would lead shareholders to think it should weather downturns better than most, so it's reassuring that the fund did so. Its focus on income in its stock holdings should point it toward steadier, fundamentally sound companies--and those tend to look more appealing to worried stock investors during market panics. In addition, this portfolio, which was once focused almost exclusively on convertible bonds, still owns a sizable stake in fixed-income instruments, and those tend to provide ballast when the stock market tumbles.
To an extent, this approach paid off as intended. Although the fund's 6.6% loss over the five-month period won't thrill its shareholders, that was one of the mildest declines in the extremely hard-hit Pacific/Asia ex-Japan category. (The category average was a staggering 21.6% loss, though that was dragged down a bit by the category's many China-specific funds, as that market took an especially hard hit.) Although this closed fund's returns looked sluggish compared with those of more-aggressive peers during the furious rally that carried Asian markets in recent years, it--like the two funds mentioned above--has held up far better than most peers during previous downturns, as it should. That trait, along with its ability to capture a decent amount of gains during rallies, has given it one of the category's best 10-year records.
Of course, with these funds, as well as others taking a cautious approach, there's only a likelihood they'll weather market turmoil in reasonable shape--not a promise. On occasion, they could fall further than most rivals, if they happen not to have a cash stake at the time and the securities they hold--which, almost by definition, are unlikely to be broadly popular--have characteristics especially worrying to the public at that time. But with so much trouble in the investment universe these days, it's encouraging to see several conservative foreign funds performing as intended.
Gregg Wolper has a position in the following securities mentioned above: SGOVX. Find out about Morningstar’s editorial policies.