INTERNATIONAL FUNDS DOWN BUT NOT OUT

Andrew Leckey,
Leckey, Andrew - Successful Investing
Posted 08/29/2008 at 6:00 pm EST

London-based portfolio manager Barnaby Wiener is having a terrific year.

His international fund is down 10 percent.

Maybe that doesn't sound so great to you, but his results exceed nine out of 10 foreign large-cap value funds in 2008. Many of those funds, once considered bastions of opportunity whenever the U.S. market exhibited weakness, have really tanked.

"The key to our fund's relatively better performance is being defensive, with underexposure in financials and overexposure in health care," said Wiener, manager of the $1.1 billion MFS International Value Fund (MGIAX). "Our big challenge at the moment is figuring into which beaten-up areas we should be increasing our exposure."

Taking a broader look at Wiener's fund besides this difficult year, it has a three-year annualized return of 9 percent and five-year annualized return of 16 percent.

Investors must decide whether to keep money in international funds even though they've been heartbreakers this year. Then they should determine whether there are attractive bargains among the ruins, since logic and history dictate that world markets can't stay down forever.

A notable example of an unduly punished foreign stock is French electrical equipment manufacturer Legrand (LR on the Paris Exchange), Wiener said. While the company's exposure to the out-of-favor construction industry has been emphasized, its revenues, margins and pricing power remain remarkably strong, he said.

Another example, the $667 million Quant Foreign Value Fund (QFVOX), is a foreign large-cap value fund that, despite its 22 percent nosedive this year, has a bright future that makes it a bargain, according to Morningstar Inc.

For years that fund successfully employed a quantitative model to rank 24,000 stocks around the world, but it recently stumbled due to a low energy stake and big declines by British homebuilders. This "no-load" (no sales charge) fund requires a $2,500 minimum investment.

"A lot of the meltdown this year has been an overreaction," said Jeff Tjornehoj, senior research analyst with Lipper Inc. in Denver. "You couldn't lose on international funds a couple of years ago, and now we're having to pay some of that back."

The global declines are across the board, with, for example, China region funds down 31 percent this year and European funds down 19 percent, according to Lipper. Latin American funds almost seem like winners with their 10 percent decline.

"There will be no lasting damage," predicted Ron Rowland, editor of the All Star Investor newsletter in Austin, Texas. "The trend toward larger allocations in international stocks for U.S. investors will be with us for many more decades."

Conservatism has been the most successful overseas game plan in 2008. At MFS International Value Fund, two-thirds of portfolio is in Western Europe, one-quarter Japan and most of the rest in non-Japanese Asia.

"I think some parts of continental Europe, such as France and Germany, could be interesting for investing because there hasn't been anything like the credit expansion of the U.S., U.K., Ireland and Spain," Wiener said. "Since there are countries where consumers haven't borrowed up to their eyeballs to buy a house, U.S. investors should be increasing their international investing."

His fund's largest stock holdings include dominant names such as France's Total SA; the U.K's GlaxoSmithKline, Royal Dutch Shell and Vodafone Group; Switzerland's Nestle SA, Roche Holding Ltd. and Novartis; the Netherlands' ING Groep; Spain's Telefonica; and Germany's E.ON. That 5.75 percent "load" (sales charge) fund requires a $1,000 minimum initial investment.

If you're not 100 percent confident about foreign investing, you could consider investing in so-called world funds that include the U.S. in their mix. Some have up to half of holdings in domestic stocks.

"The U.S. stakes in world stock funds have allowed them to hold up considerably better than either foreign-only or domestic-only funds," said Arijit Dutta, analyst with Morningstar Inc. in Chicago.

Two world funds that have proven especially resilient, Dutta said, are:

-- The $97 million Marsico Global Fund (MGLBX), launched mid-2007 and up 6 percent in the past 12 months. Fifty-six percent of its portfolio is in U.S. stocks.

Seasoned veterans Tom Marsico and Jim Gendelman are on a management team led by Cory Gilchrist that combines macroeconomic analysis with shrewd stock picking. This concentrated portfolio of around 50 stocks can really take off, and its MasterCard holdings have provided a solid boost. Other top holdings are Wells Fargo Co. and Denmark's Vestas Wind Systems. This no-load fund requires a $2,500 minimum investment.

-- The $1.1 billion T. Rowe Price Global Stock Fund (PRGSX), a relatively flat performer over the past 12 months with a three-year annualized return of 13 percent. Forty percent of its portfolio is in U.S. stocks.

Manager Rob Gensler took over in 2005 and has proven adept at finding outstanding opportunities, such as American Tower Corp. and a number of Latin American stocks. He has even scooped up a few downtrodden choices in housing. Biggest holdings are Mexico's America Mobile and Google Inc. A no-load fund, it requires a $2,500 minimum investment.

Despite the overall gloomy global record this year, each foreign market is unique.

"I will be looking at Russia, China, Brazil and India for signs of a turnaround," said Rowland. "Many European countries also have the potential for a strong move during the next bull phase."

(Andrew Leckey answers questions only through the column. Address inquiries to Andrew Leckey, 555 N. Central Ave., Suite 302, Phoenix, AZ 85004-1248 , or by e-mail at andrewinv@aol.com.)

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