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Don't Ignore Global Funds When Picking Core Holdings

These two global blue-chip funds make good portfolio centerpieces.

William Samuel Rocco, 02/04/2010

World-stock funds haven't really caught with investors as core equity holdings. Overall, the world-stock category has roughly $270 billion in assets at present, whereas the three domestic large-cap groups have between $500 billion and $925 billion in assets each, and the foreign large-blend category has almost $370 billion in assets.

There are some logical explanations for the relatively limited popularity of world-stock funds. Most of them pay lots of attention to blue chips based in the U.S. and large companies headquartered overseas and thus are inappropriate for investors who already own a mainstream domestic large-cap fund or a traditional foreign large-cap fund because of portfolio-overlap issues. Global large-cap offerings tend to have significantly higher expense ratios than their U.S. and foreign rivals. And more than a few world-stock offerings are run by managers that have far more domestic expertise than international knowledge--or vice versa--and some of them employ strategies that make them too bold to serve as good core equity holdings.

But investors who are just starting out--or who don't already own a mainstream domestic large-cap fund or a traditional foreign large-cap fund--needn't worry about portfolio-overlap issues. There are more than 200 funds in the world-stock category, and a number of them are attractively priced, are in the hands of managers with global skill sets, and follow strategies well-suited to core holdings.

Meanwhile, topnotch global funds have one significant edge over their counterparts running offerings that focus specifically on either domestic or foreign equities. Their managers have the freedom to choose the companies that they consider to be the best opportunities regardless of the firms' domiciles. By contrast, the skippers of U.S. and international fund often are unable to buy certain stocks or have to settle for their second- or third-ranked options in particular sectors because of the location of the companies' headquarters.

Investors who are searching for portfolio centerpieces, therefore, should be sure to consider the better options in the world-stock category. Two that catch the eye are American Funds New Perspective ANWPX and Dodge & Cox Global Stock DODWX, which are terrific offerings overall.PAGEBREAK

American Funds New Perspective ANWPX
This global fund has way more than its share of strengths. Its expense ratio of 0.85% is roughly 60 basis points below the median for world-stock offerings that charge a front load and 40 basis points below the median for U.S. large-cap funds that levy a front load. The eight members of its team have between 13 and 37 years of experience at their firm, and they have quite bit of domestic and international stock-selection talent. (Most of them also serve as comanagers on one or more of their firm's fine U.S. or foreign-equity offerings). While the eight comanagers employ their own individual strategies, they all favor attractively priced blue chips that they can hold for years, so the aggregate portfolio contains a diverse set of global leaders with relatively limited turnover. And the comanagers have delivered the goods in wide variety of markets climates. The fund has gained far more than the typical world-stock, large-blend, and foreign large-blend offerings over the mid and long runs while suffering less or comparable volatility. This shows what an excellent global offering can accomplish.

Dodge & Cox Global Stock DODWX
This young world-stock fund has posted mixed results over its first 21 months, but it has an abundance of attractions. Dodge & Cox is an excellent shop, and it has had lots of long-term success with this fund's older siblings, including Dodge & Cox Stock DODGX and Dodge & Cox International Stock DODFX. Most of the members of this fund's six-person management team are part of the management teams on one or both of those funds and all of them are veterans of the firm, so they have the skills to run a global offering and are quite seasoned. Not surprisingly, this fund uses the same value-oriented stock-selection strategy as its domestic- and foreign-equity sibling. There are some bold aspects of that approach, but this fund provides exposure to a broad mix of larger caps from around the world, as a global core holding should. And its expense ratio of 0.74%, which is roughly 40 basis points below the median for no-load world-stock offerings and 20 basis points below the norm for no-load large-cap funds, adds to its appeal.

Conclusion
American Funds New Perspective and Dodge & Cox Global Stock have lots of merit as core equity holdings. They do come with one caveat, though. They normally park 50% to 60% of their assets to foreign stocks--and sometimes devote even more abroad--so they provide bigger international weightings than many financial advisors would recommend for investors' portfolios overall. That's something to consider. However, investors who are uncomfortable with that much foreign exposure but who like the idea of using one of these two funds as their core equity holding could readily lower the international weighting of their portfolios by choosing a domestic-oriented set of supplemental equity holdings.

Further, as national economies have become more interdependent and larger businesses have become more globalized, the line between domestic and foreign companies has become blurred. Indeed many domestic powerhouses earn hefty percentages of their revenues abroad, and many foreign blue chips produce sizable portions of their revenues here in the United States. For example, Schlumberger SLB, which both of the funds own and which is classified as a U.S. stock because it has headquarters here, operates in 80 countries and makes a healthy majority of its money overseas, whereas Roche RHHBY, which both offerings hold and which is categorized as a foreign security because it is based in Switzerland, employs 26,000 people and generates approximately one third of its revenue in the United States.

Thus, it doesn't make as much sense to distinguish between U.S. companies and foreign firms as it once did. There's ample reason to consider a core equity fund that has the leeway to go wherever it finds the best opportunities.

William Samuel Rocco is a senior fund analyst at Morningstar.

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