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Three Managers Who Had a Tough 2010

But these funds still have what it takes.

William Samuel Rocco, 01/12/2011

It was anything but easy sailing for foreign-equity managers in 2010, even though most overseas stock markets ended the year with high-single-digit or low-double-digit gains in dollar terms. Nearly all of the world's equity exchanges experienced a lot of volatility during the year. There also was quite a bit of variation in performance across the geographic, style, sector, and market-cap spectrums in 2010. Indeed, emerging markets handily outgained developed exchanges; growth stocks comfortably outpaced value issues; the industrial and materials sectors returned far more than the health-care and utilities sectors; and small-cap names gained much more than large-cap stocks.

Many talented foreign-equity managers navigated these challenging seas very well. For example, Brent Lynn of Janus Overseas JAOSX, who won the Morningstar 2010 International-Stock Manager of the Year award, earned top-notch gains. David Herro of Oakmark International OAKIX, Rohit Sah of Oppenheimer International Small Company OSMAX, the team at Tweedy, Browne Global Value TBGVX, and David Winters of Wintergreen WGRNX--who were finalists for the award--produced first-rate results as well.

However, several skilled international-stock skippers struggled in 2010's demanding conditions. Three who posted especially poor results run very prominent funds. Thus, we decided to take a close look at what caused their funds to languish last year and whether there are any causes for long-term concern.

The Team at American Funds Capital World Growth & Income CWGIX
There's no denying the fact that the team failed to deliver the goods at this front-load world-stock offering last year. The team's taste for giant caps and emphasis on undervalued dividend payers slowed returns. Its decisions to stick with its relatively hefty stakes in telecom names and European stocks were burdensome as well, as such issues generally posted subpar returns. Consequently, this fund gained 6 percentage points less than the world-stock norm of 14% in 2010, finishing behind nearly 90% of its peers.

That's disappointing, of course, but the factors that held this fund back are central to the strategy that the team has employed here since the early 1990s. That strategy--which consists of buying attractively priced blue chips with healthy yields, letting country and sector weights fall where they may, and being patient--is inherently sound. The team used it to earn good results in all kinds of climates prior to 2010, in fact, so this fund boasts top-decile 10-year and 15-year returns. And that long-term record of success, plus the good results that the members of the team have earned elsewhere and the ongoing advantage of a low expense ratio, means that this fund has bright prospects.PAGEBREAK

Mark Yockey of Artisan International ARTIX, Artisan International Small Cap ARTJX
Mark Yockey had a tough go of it at both of his funds in 2010. Artisan International finished in the foreign large-blend category's basement with a return that lagged the group average by 4 percentage points, hurt by Yockey's decision to load up on European banks (most of which languished last year) as well as some of his picks in other areas, such as the German chemical and health-care conglomerate Bayer BAYRY and the Swiss pharmaceutical and diagnostics leader Roche RHHBY. Artisan International Small Cap, which is closed to most new investors, gained 9 percentage points less than the its category average, as a diverse mix of holdings, including the German electronic-payments company Wirecard WDI and China Gas, faltered.

These results, disheartening at they may be, should be kept in perspective. Though Yockey is a price-conscious growth investor, he searches far and wide for opportunities and has the courage of his convictions. Thus, his funds often sport sizable geographic and sector overweightings, and they usually stand out from their category peers. These distinctions can backfire, and both funds had rough spells prior to 2010. But Yockey's decision-making has been on the mark more often than not--and has sometime led to great results. Both funds have produced good returns over the long run. Those records, plus the inherent strengths of Yockey's flexible but disciplined approach, provide ample grounds to be optimistic about both funds in the future.

Kirk Henry of Dreyfus Emerging Markets DRFMX
Several of Kirk Henry's calls failed to pay off for this front-load diversified emerging-markets offering in 2010. Henry kept this fund's exposure to consumer-related stocks fairly modest for valuation reasons, and many such issues posted especially strong gains last year. He invested more in the relatively sluggish utilities sector than most of his peers did. And he added to a number of names on weakness that ended up posting significant losses, including top-25 holdings Petrobras PBR and the Korean steel maker Posco PKX. As a result, this fund trailed the vast majority of its rivals in 2010.

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