The Year's Hottest Investments: Foreign Edition
Each year, Kiplinger's Personal Finance releases its list of top-performing mutual funds in 11 different categories. And while Foolish investors know that past performance isn't the only thing that should be considered when buying a fund, past results do give us a clue into how the fund may perform in the future. In this three-part series, I'll look at Kiplinger's best-performing funds in three popular asset class categories and parse out which funds investors might want to consider buying and which ones they might want to stay away from. So far, we've covered the top-performing domestic large-cap and small-cap funds -- today we wrap up with foreign funds.
Best of the best
From Kiplinger's, here are the 10 top-performing funds in the large-cap diversified foreign category over the past 10 years (through July 31, 2011):
10-Year Annualized Return
|Fidelity Canada (FICDX)|
|Fidelity Advisor Canada (FACNX)|
|BlackRock International Opportunities (BREAX)|
|Harbor International Instl (HAINX)|
|Harbor International Investor (HIINX)|
|Janus Overseas (JAOSX)|
|Quantitative Group Foreign Value (QFVOX)|
|Dodge & Cox International Stock (DODFX)|
|Federated InterContinental (RIMAX)|
|Thornburg International Value (TGVAX)|
And while I always encourage investors to judge funds by their long-term returns, rather than short-term results, you need to look beyond simple returns to get a better idea of whether or not a fund is worth buying.
Two of my favorite foreign funds land on this best-performers list. The first is Dodge & Cox International Stock (DODFX). The focus here is on undervalued and out-of-favor stocks with healthy balance sheets. The fund is heavy into pharmaceutical names, based on the belief that valuations for these companies are at all-time lows while returns on capital remain substantial. Holdings in this arena include Swiss firm Novartis (NYS: NVS) and the U.K.'s GlaxoSmithKline (NYS: GSK) . Because the fund frequently takes a contrarian position, it can move out of step with the markets from time to time, but the long-run picture is quite pleasing. It fund outranks 97% of its peers over the past decade. The investment team here is one of the best in the business, so if you're looking for a core foreign fund, Dodge & Cox International Stock is an excellent choice.
The second fund is Harbor International (HIINX). The institutional version of the fund (HAINX) also appears on the list, but many investors won't have the $50,000 minimum to get in the door, so the Investor shares are a much more reasonable choice. While the fund's longtime manager passed away in October 2010, the analyst team taking over for him had been groomed to run the show for some time. All four of the fund's current co-managers had worked with the former skipper for years, so they are well-versed in the process that has led to the fund's success.
Management is very bullish on China and believes that the dragon nation will fuel a worldwide economic recovery. So even though the fund's primary focus is foreign developed companies, it has a hefty 14.6% allocation to emerging markets, including PetroChina (NYS: PTR) , China Mobile (NYS: CHL) , and China Life (NYS: LFC) . Reasonable expenses and low turnover add to this fund's charms, making it a solid option for diversified foreign investors.
Thornburg International Value is a very solid fund, and I like its go-anywhere flexibility and its willingness to invest heavily in sectors or countries where the team sees bargains. It's a good core holding, but only if you can buy the fund without paying its front-end load (in an employer-sponsored retirement plan, for example). If you can't avoid the load, I'd recommend going with another load-free foreign fund.
Janus Overseas is not for the faint of heart, but it could be a good choice for investors who embrace risk. This fund is aggressive and tends to suffer more during market downturns. However, it also has a tendency to outshine the market during bull runs. Long-term performance has been solid, but the ride along the way has been bumpy. If you're willing to stomach the ups and downs, this fund could be a winner for you.
Of the remaining five funds, while many are solidly run, I think there are better options. Fidelity Canada has done very well, but country-specific funds are difficult for the average investor to own because they can be so volatile. In addition, the fund got a new manager back in late 2008, so its past performance isn't as meaningful. And if you can buy the Fidelity Canada Fund, there's no reason to pay the 5.75% front-end load for the Advisor shares of the same fund.
And while BlackRock International Opportunities, Quantitative Group Foreign Value (now named Pear Tree Polaris Foreign Value), and Federated InterContinental have surely performed well, they are all a bit pricey for my tastes. While the average foreign large blend fund charges 1.44% according to Morningstar , these funds clock in above that at 1.59%, 1.62%, and 1.48%, respectively. In addition, both the BlackRock and Federated funds charge front-end loads. So while the funds have done well, expenses keep them from landing in the top tier of foreign funds, in my opinion.
So remember when looking at lists like these of the best-performing mutual funds, there's more to an investment than its past performance. True due diligence requires digging deeper into the numbers and considering expenses, management, and consistency of the investment process. It takes a bit of work, but at the end of the day, you'll end up with better funds than if you judge on the basis of performance alone.
At the time this article was published Amanda Kishis the Fool's resident fund advisor for the Rule Your Retirement investment newsletter. Amanda and the Fool own shares of Dodge & Cox International Stock. The Motley Fool owns shares of GlaxoSmithKline and China Mobile.Motley Fool newsletter serviceshave recommended buying shares of GlaxoSmithKline, Novartis, and China Mobile. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policy.
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