Will Big Inflows Slow These Top Foreign Funds?
Popularity can be a burden.
While the mutual fund landscape has changed in many ways over the years, one thing remains constant: Money chases the hot performers. But a hefty influx of investor dollars can hamper flexibility, a concern if a nimble asset base contributed to strong returns in the first place. Among actively managed equity funds that earn medals from Morningstar analysts, the three below have attracted the most cash, on a net basis, in the first nine months of 2014. (We excluded passive funds from the list as flows typically don’t have as much of an impact on them.) We took a closer look at each fund to determine whether their recent cash surges are likely to weigh them down. Coincidentally, all three happen to be foreign-stock funds.
Dodge & Cox International Stock (DODFX)
YTD Inflows: $8.4 billion
This Gold-rated fund has excelled for much of its 13 years of operation, but it’s been on an especially strong run lately: It finished in the top quintile of its category in four of the past five calendar years. (It moved from foreign large value to foreign large blend in 2012.) And although it lost 2% in 2014 through Oct. 15, the fund tops more than 95% of peers over that period.
Cash has poured in as a result, but the fund appears well-equipped to handle it—arguably more so than the two below, as the team has handled large sums in the past and the fund tends to focus heavily on large-cap stocks. The managers have always plied a patient, contrarian style, so the fund is often buying what others are selling and vice versa. Indeed, when emerging markets sank in 2013, the team added to the fund’s already-substantial stake in developing markets--that move paid off, as such markets have largely outperformed developed ones in 2014. Furthermore, the fund is no stranger to big inflows; it took in a net $12.4 billion in 2006 and $18.9 billion in 2007, peaking at a total of $55 billion in assets in late 2007. The fund beat more than 65% of its peers in both those years. True, it went on to lose more than most competitors in 2008’s nosedive, but that was due in part to its emerging-markets stake and errant financials picks. And the fund rebounded in a big way in 2009’s rally.
Oppenheimer International Growth (OIGAX)
YTD Inflows: $5.0 billion
This fund, which launched in 1996, hasn’t dealt with this much attention from investors before. It’s tripled in size since early 2012 to $18 billion, largely because it took in a net $4.2 billion in 2013 along with its $5 billion haul thus far this year. Investors have no doubt been attracted to the fund’s recent hot streak: It surpassed the majority of its foreign large-growth peers in each calendar year from 2008 to 2013.
Manager George Evans, who’s run the Silver-rated fund since its 1996 inception, achieved these consistent results by mixing fast-growing firms with relatively stable ones, and by minimizing bets on individual stocks--the fund usually holds 100-150 names and top holdings comprise less than 2% of assets. This diversified approach, along with Evans’ tendency to hang on for the long haul (annual portfolio turnover usually lands in the teens), should mitigate concerns about capacity. It’s fair to wonder whether the fund will be able to continue to own a hefty stake in mid-cap stocks (33% of assets at the end of August, compared with the category norm of 12%) at this size, but due to Evans’ long holding periods, this isn’t a pressing issue. Inflows have also slowed for the past couple of months, probably because the fund has lagged most of its peers in 2014 due to a light stake in emerging markets and picks with double-digit losses such as German software maker SAP and U.K. plastics maker Essentra.
MFS International Value (MGIAX)
YTD Inflows: $4.4 billion
Like the Oppenheimer fund, this one has grown quickly: from $4 billion at the start of 2012 to roughly $20 billion. The Silver-rated fund beat more than 70% of its foreign large-value peers in four of the previous six calendar years, landing in the top 5% thrice. As a result, the fund took in a net $2.9 billion in 2012 and another $5.2 billion in 2013, and it’s on pace to pull in nearly $6 billion this year.
In addition to the rush of inflows, the fund is undergoing a management change. At the end of this year, Barnaby Weiner, a comanager here since 2003, will leave the fund to run other MFS accounts. Pablo de la Mata, who has served as an analyst here for six years, was named a comanager at the end of September to fill his shoes. Meanwhile, Benjamin Stone, a comanager on the fund since 2008, will remain on board. The transition should be smooth; de la Mata was informed of this move one year ago, and the fund’s strategy isn’t expected to change.
That strategy appears capable of successfully absorbing the surge of new cash without major hiccups. True, the fund typically owns more mid-cap stocks than the category norm. But management has often spread the assets across 100 or more holdings, and hasn’t had to increase that number as the fund has grown--indeed, the fund holds about 20 fewer stocks now than it did at the end of 2011. Infrequent trading has also been a hallmark of the fund since the volatility of 2008-09 has subsided; annual portfolio turnover hasn’t exceeded 25% since then.
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Greg Carlson has a position in the following securities mentioned above: DODFX. Find out about Morningstar’s editorial policies.