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The Year in International Funds 2010

Wide variations in returns as markets reacted to global surprises.

Gregg Wolper, 12/22/2010

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Evaluating the performance of international-stock funds for 2010 is not a simple task. While market rallies in many places have provided nice gains for most shareholders of international-stock funds, the variations among categories, countries, and sectors mean that each fund--and each type of fund--tells a different story.

One general theme that was firmly in place in the first half of the year has remained intact: Smaller has been better. But in other ways, things have changed. Most notably, at midyear the Japan category was among the top performers among the international-fund groups. Now Japan is back to its accustomed place near the bottom of the category rankings.

The Category Story
As with the U.S. stock market, foreign exchanges have seen a striking distinction between the performance of large stocks and small ones in 2010. That explains why the top two of the 14 international-stock categories for the year to date through Dec. 17 are foreign small/mid-growth at 19.7% and foreign small/mid-value at 17.6%. (Morningstar doesn't have distinct small- or mid-cap categories for foreign-stock funds because such groups would contain so few funds.)

Note that the growth group beat the value group. That theme was even more pronounced among bigger stocks. In fact, the very worst of the 14 international categories for 2010 is foreign large value, with a gain of just 5.4%.  Foreign large blend, the second-worst performer, had a more respectable showing, posting an 8.1% return. Meanwhile, the foreign large-growth group really stands out from its large-cap peers, rising 12.5% in 2010.

In investing, though, nothing is simple. In fact, there's more to this story. Emerging markets also had a strong year: The diversified emerging-markets category gained 15.9% to rank third among the international groups. (Separately, the emerging-markets bond group ranked second among 13 fixed-income categories.) And the typical foreign large-growth fund has a larger helping of emerging-markets stocks in its portfolio than the typical foreign large-blend or foreign large-value offering does. So, is the fine showing of the foreign large-growth group due to its growth tilt or its oversized emerging-markets stake? Or is that two ways of saying the same thing, for growth stocks are more likely to be found in emerging markets? Most likely, all of these factors are acting in concert.

Finally, it's worth taking a look at the newest international category. Given the proliferation of China-related funds , we finally decided to separate them into their own group this year. How do the year-to-date figures look? Good, but not as dominating as they might have in some other years. Mainland China's local stock market has been held back this year, largely because of actions taken by the Chinese government. So, while the China Region category is up 11.7% in 2010, it's far behind the broad emerging-markets group and even lags a bit behind foreign large growth.

Within the Groups
It's important to remember these variations when evaluating the performance of individual funds within categories. The purpose of dividing funds into categories is to make comparisons more meaningful because a fund is grouped with similar offerings. Nevertheless, it's impossible to avoid having some distinctions between the various funds even within the same categories, and those differences can affect performance rankings.

For example, because of the strong showing of smaller stocks in 2010, the top performers in the large-cap categories tend to be those that, while falling in a large-cap style box overall, have substantial doses of mid-caps and/or small caps in their portfolios. That trend is noticeable in other groups such as the world-stock category as well. Those global funds that focus on smaller companies are bunched toward the top of the 2010 chart.

In other categories, country effects are pronounced. India funds (along with small-company funds) generally are massed toward the top of the Pacific/Asia ex-Japan category, and Russia funds join small-cap portfolios atop the Europe-stock group. Keep this in mind when evaluating the 2010 performance of a Pacific/Asia or Europe fund that focuses on bigger companies spread throughout the region. Such a fund's ranking probably is lower than it would have been had it been ranked only against its broad-region peers.

Standouts and Stragglers
Of course, fund performance doesn't rely only on broad market-cap or regional trends. Managers' decisions on individual stocks can have a critical impact as well. For some funds, unusual and successful decision-making set them apart this year. We highlighted the most noteworthy cases last week, explaining why the managers of Janus Overseas JAOSX, Oakmark International OAKIX, Tweedy, Browne Global Value TBGVX, Wintergreen WGRNX, and Oppenheimer International Small Company OSMAX are this year's nominees for the Morningstar International Fund Manager of the Year.

The year did not feature success stories only, though. Among funds from larger families that haven't much enjoyed 2010 are Fidelity Overseas FOSFX, which sits in the bottom quartile of the foreign large-blend category for the third straight year, and DWS International SUIAX, scraping the bottom of that same category in its first year under new managers.

Finally, it was a rough year, relatively speaking, for those enamored of the once-trendy BRIC (Brazil, Russia, India, China) idea. Templeton BRIC TABRX and Goldman Sachs BRIC GBRAX landed in the 95th and 96th percentiles of the diversified emerging-markets category, respectively. Unfortunately for these funds and their shareholders, neither Brazil nor China held up its part of the acronym this year.

Gregg Wolper is a senior mutual fund analyst with Morningstar.

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