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Foreign Funds You Can Stick with for the Long Haul

Steep losses have investors worried, but we think these funds are still top choices.

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If your international funds' staggering losses in 2008 have left you feeling a little ill, you're not alone. On average, diversified foreign large- and small/mid-cap focused funds have posted losses from 41% to 48% for the year to date ended Nov. 6, 2008. These steep drops have erased the red-hot gains of the past few years and have presumably prompted many investors to sell their international fund shares.

Given the volatility in this asset class, we crafted a screen that seeks funds that have performed well overall through both bull and bear markets. We focused on the five foreign diversified fund categories that own large- and small/mid-cap stocks. Performancewise, we selected those with top-third 10-year category rankings, in addition to top-quartile showings in 2008. In terms of risk, we narrowed it down to funds that have achieved low, below-average, or average Morningstar Risk ratings. This measure assesses variations of monthly returns compared with similar funds over the three-, five-, and 10-year periods, penalizing funds with more downside risk because investors are particularly sensitive to absolute losses. Lastly, we set the screen to pull funds that are open to new investment and which also sport reasonable price tags.

The  Premium Screener pulled 12 funds as of Nov. 6, 2008. To see the full list, click  here.

In many ways, this year's market downturn has been unlike anything that mutual fund managers have dealt with in the past, though certain strategies that are holding up better now also have weathered turbulent markets of the past.

Morningstar analysts have written about the resilience of  MFS International New Discovery (MIDAX) during such times. A foreign small/mid-cap growth fund, this offering has consistently been one of the steadiest offerings in this very volatile group. Lead manager David Antonelli, skipper here since 1997, tilted the portfolio toward larger-cap stocks in recent years while small-cap stocks continued their multiyear rally. While the fund gave up some gains prior to 2008, Antonelli's risk awareness has saved investors some pain this year. Of course, the asset class is highly volatile in absolute terms, so investors should consider this only as a supporting player in their overall portfolios.

Another notable fund from this list is  UMB Scout International (UMBWX), run by James Moffett, a two-time Morningstar International-Stock Manager of the Year nominee. Since its 1993 inception, this foreign large-blend fund sailed past its category average, as well the MSCI EAFE Index and the MSCI World ex-US Index. (The former excludes emerging-markets stocks.) Moffett does invest in emerging markets, though his focus on large-cap firms listed as American Depository Receipts does mitigate some risk. ADRs offer greater transparency and uniformity in the firms' accounting principals, as well as greater liquidity and focus on shareholder value. Moffett's cautious approach on political risk has kept him from building stakes in Chinese and Russian firms, and that stance also has helped the fund recently. In general, Moffett's process has kept this fund's long-term volatility below average, creating a very attractive risk/reward profile for shareholders.

As far as foreign large-growth funds go,  Harding Loevner International Equity (HLMIX) has been very steady over the years. True, manager Simon Hallett's focus on revenue and dividend growth, as well as healthy balance sheets and cash flows, has held the fund back when cyclical fare and speculative-growth stocks have soared. And though the fund's high-quality growth discipline has made it milder-mannered than some peers, it certainly has its risks. The relatively compact portfolio of 50 stocks courts company-specific risk, and the fund also tends to have a decent helping of emerging-markets stocks. Clearly, stock selection among emerging-markets stocks has been key in keeping the fund ahead of peers this year (and in general); a sizeable stake in health-care stocks has also kept the fund more stable lately.

So again, these funds are worthy of consideration, but make sure you limit them to allocations that you can handle, whatever the market brings.

Don't have a Premium Membership? You can still use our Premium Fund Screener by taking a free, 14-day trial.

Karin Anderson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.