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Find Foreign Funds Treading Lightly in Emerging Markets

These funds aren't betting big on volatile developing economies.

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In equities' steep plunge from October 2007 through the most recent trough of March 9, 2009, as well as the ensuing rebound, non-U.S. stocks have been even more volatile than their U.S. counterparts: They fell further, and they've since rallied harder, in part due to currency movements. Emerging-markets stocks have provided an especially wild ride. When investors grew fearful that those faster-growing economies would be severely impacted by the global recession, the typical diversified emerging-markets fund lost a stomach-churning 62% in the downturn. As optimism has returned, the funds have since soared 60%.

The turbulence of emerging markets may make investors wary. And although nations such as China, India, and Brazil may indeed boast stronger economic growth in the coming years than the economies of, say, Western Europe, enthusiasm for emerging-markets stocks has returned so quickly that they may have come back too fast and too far. Risk-averse investors might do well to seek out a core foreign-stock fund that doesn't bet big on emerging markets; it can still provide exposure to a broad range of excellent companies outside the U.S. (some of which will benefit if emerging markets do deliver on their expectations).

In order to find a fund that fits the bill, we used Morningstar's Premium Fund Screener tool on Morningstar.com. We searched for distinct portfolios within Morningstar's three foreign large-cap categories (foreign large-blend, foreign large-growth, and foreign large-value) that required an initial investment of $10,000 or less; we also screened out funds with limited availability by requiring a minimum investment of greater than zero. We also wanted funds where the manager had been on board for at least five years and outpaced a minimum of two thirds of category peers over both 12 months and five years. We wanted funds with expense ratios less than or equal to their category averages. Finally, we sought out funds that recently stashed less in emerging-markets stocks than their typical category rivals.

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