Finding Sturdier Foreign- and World-Stock Funds
These managers typically focus on rock-solid companies.
In recent months, we've been using Morningstar's Premium Fund Screener to home in primarily on U.S. equity funds that should perform better, on a relative basis, if economic growth is slow in the coming years. The substantial growth of the global economy prior to 2008 was fueled in part by leverage taken on both by corporations and consumers, which helped bring about the ensuing financial crisis and deep recession. Now that those excesses are being wrung out and the ability to take on so much leverage is somewhat limited, many of the investment pros we talk to are predicting a "new normal" era of slower growth.
This month, we're going to use the screener to find foreign- and world-stock funds that can succeed in a world of restrained economic growth. To do that, we set the screener to seek out distinct funds in the broad international stock category that Morningstar's fund analysts cover and consider to be either core holdings or supporting players (but not niche, specialty holdings). We then narrowed the list to funds where the typical holding generated a 15% return on equity and had a debt/capital ratio lower than the category norm both last year and the year before. Such companies have solid competitive advantages and ought to be prized by investors in a slower-growth world. We also limited our search to funds with managers that had been on board for at least five years and had outpaced 75% of the fund's category rivals over that span, charged lower fees than the category norm, and could be purchased by new investors for $10,000 or less.
As of Oct. 19, 2009, the screener found six funds that met our criteria. Click here to run the screen yourself.
AIM International Growth (AIIEX)
American Funds EuroPacific Growth (AEPGX)
American Funds New Perspective (ANWPX)
Oppenheimer International Growth (OIGAX)
Putnam International Capital Opportunities (PNVAX)
USAA International (USIFX)
American Funds' offerings tend to pass these screens because many of the firm's managers favor companies that are financially sturdy and have a history of paying out sizable, increasing dividends. Those traits, in turn, are often signs of well-established business franchises. Beyond such prudent investing criteria, American's funds boast veteran managers backed by a huge analyst staff and very modest fees--giving them long-term edges over many rivals. EuroPacific Growth invests primarily in overseas blue chips, but the managers don't just lock on to the very largest names. They steered clear of most Western banks going into the financial crisis (thus avoiding most of the carnage there) and have boosted their stakes in solid businesses in emerging markets--which has provided a big boost in the recent rebound. As for New Perspective, it applies a somewhat similar approach to the entire world (including the U.S.), but the managers are a bit more value-oriented; they seek out top companies that are undergoing what they deem to be short-term problems and are thus selling at discounts. Both funds not only meet our five-year performance screen but have also outpaced at least 80% of their respective category rivals over the past decade.
Oppenheimer International Growth's manager, George Evans, uses a theme-based approach (like most of the firm's managers who invest overseas). He's looking for companies that should benefit from the trends of mass affluence, new technology, restructuring, and aging. Within those themes, he has a good deal of flexibility. In recent years, he's invested more heavily in steady-Eddie fare such as health-care firms and makers of consumer staples. But in the past, Evans (who's run this fund for 13 years) hasn't been shy about delving deeply into rapid growers selling at lofty valuations. Thus, this fund is best suited for investors who can handle a sometimes-bold offering. But its long-term record is superb.
USAA International focuses exclusively on firms with above-average, sustained earnings growth selling at modest valuations. It's consistently loaded up on makers of everyday consumer goods (which recently comprised 34% of assets) and large drugmakers such as Roche (RHHVF). Managers David Mannheim and Marcus Smith, who have run this fund for seven years, run a somewhat compact portfolio (the fund recently held 68 stocks). The fund has proved sturdier than most of its foreign large-growth rivals--although it tends to lag in rallies led by racy fare (such as 2009's rebound), it held up extremely well in the October 2007 to March 2009 bear market.
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Greg Carlson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.