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Kip 25

How Foreign Funds in the Kiplinger 25 Are Faring

With foreign stock markets in turmoil, the international picks among our favorite funds have fallen further than their domestic brethren.

This year's downturn in U.S. stocks coincided with an even deeper plunge overseas. The European government debt crisis dragged down markets all over the world, including those in emerging nations, which were already under pressure because of worries about rising inflation and slowing growth.

So far this year, the MSCI EAFE index, a measure of stock-market performance in developed markets, is down 11.7%. That compares with a loss of 1.1% for Standard & Poor’s 500-stock index (unless otherwise noted, results are through October 14). From the peak of the U.S. stock market, on April 29, through the bottom, on October 3, the EAFE tumbled 23.9%, putting foreign stocks into official bear-market territory of a 20% decline; the S&P fell 18.6%, just missing the bear designation. (Of course, to quote that immortal investment seer Yogi Berra, it ain’t over till it’s over. U.S. stocks could still stumble into the bear’s lair.)

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Not surprisingly, the four foreign and global funds in the Kiplinger 25 took it on the chin during the slump. Oakmark Global (symbol OAKGX), which, as its name suggests, invests all over the world, fared best, losing 9.4% year-to-date. That’s not surprising, given that the fund at last word had 41% of its assets in U.S. stocks. One of them, MasterCard (MA), soared 52.7% this year. Managers Clyde McGregor and Rob Taylor like to move in areas others fear to tread. That may be why 21% of the fund’s assets at last report was in shares of Japanese companies, such as Daiwa Securities (DSEEY) and Hirose Electric. Japan has been one of the year’s better foreign markets, slipping only 14.2%.

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But Oakmark had 16% of its assets in Switzerland, and that proved to be a drag, says Taylor, as its market suffered because of concerns about the European government debt crisis and the strong Swiss franc. Shares in Swiss private bank Julius Baer (JBAXY), one of Oakmark’s ten biggest holdings, dropped 17% this year.

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T. Rowe Price Emerging Markets Stock (PRMSX) plunged 28.5% during the international bear market, losing 0.5 percentage point more than the MSCI Emerging Markets index. So far this year, the fund is off 15.4%, compared with 11.7% for its benchmark. Manager Gonzalo Pangaro focuses on companies with strong balance sheets and cash flow. This year, that has led him toward makers of consumer necessities, a group that held up relatively well during the market slump.

And although the MSCI Korea index has fallen 12.9% this year, two Korean companies gave the fund a boost in the third quarter: Shares in household-products company LG Household and Health Care climbed 5.0% in the period, and those of NHN, South Korea’s top Internet portal, jumped 8.8%.

The Price fund avoided exposure to emerging European countries that got throttled this year, such as Hungary, but its investments in the BRICs -- Brazil, Russia, India and China -- hurt. At last report, the fund held two Chinese Internet companies, Sina (SINA) and Baidu (BIDU), that had been on a tear until they succumbed to the market turbulence.

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Harbor International (HIINX) took a beating during the correction, sinking 27.7%, and year-to-date it’s down 9.4%. The fund’s managers, who veer toward high-quality companies trading at reasonable valuations, sold shares in European financial stocks last summer. Facing growing regulation and declining profitability, “banks are at risk of becoming utilities and therefore are not attractive on a risk-reward scenario,” says Jean-Francois Ducrest, who is one-fourth of the quartet who run the fund.

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Ducrest and his co-managers, Howard Appleby, James LaTorre and Edward E. Wendell Jr., had a relatively modest 14% of Harbor’s assets in emerging-markets stocks. But when growth in developing countries such as China slowed over the summer, some of the fund’s holdings in established countries tumbled in response. For example, shares of Australian miner Xstrata (XSRAY) sank 32.7% this year. Sandvik (SDVKY), a Swedish industrial company that earns about 18% of its sales from Asia, has seen its shares drop 33.3%, too.

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Dodge & Cox International Stock (DODFX), whose managers look for undervalued fare, also had a rough go during the bear market, diving 28.1%. So far this year, the fund is down 12.0%.

One of the International Stock's problems was having too little money in Japan. The fund had about 14% of its portfolio in Japanese stocks, compared with a 20% weighting in the EAFE index. “Positioning in Japan was a detractor,” too, says Diana Strandberg, one of the fund’s eight managers. The fund had exposure to large export-based companies, such as Honda (HMC), Fujitsu (FJTSY) and Sony (SNE), which suffered more than stocks in other sectors in the first half of the year. “But that’s where we see good valuations,” Strandberg says.

International Stock's managers won't change their ways just because of 2011's lousy results, adds Strandberg: “We’re still long-term-oriented, still bottom-up stock pickers, and the portfolio hasn’t changed dramatically.” They have been “nudging” in areas where they see opportunity, including health care and telecom, and “trimming back” positions in other areas, such as emerging-markets banks.

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