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Moderate Global Funds That Deserve More Attention

These funds should deliver solid long-term results with modest volatility.

William Samuel Rocco, 12/23/2009

When looking back on an extraordinary year for global investors, one fact is impossible to miss: Aggressive foreign funds have handily outpaced more-reserved ones. Emerging-markets funds have gained more than 65%, and the two foreign small/mid-cap categories are in the 42% to 46% range for the year to date through Dec. 18, 2009. By contrast, foreign large-cap and world-stock funds have gained a more pedestrian, though still impressive, 28% to 35% this year.

As could be expected, the core international funds that pay lots of attention to emerging-markets or small-cap issues have left most of their category peers in the dust in 2009. Masters' Select International MSILX, which typically has relatively high stakes in the developing world and the mid-cap space, is ahead of the vast majority of its foreign large-blend rivals. Janus Overseas JAOSX, which is even more adventurous, leads the foreign large-growth category with a spectacular 74% return.

Such results might lead some investors to conclude that bold core international funds are preferable to tame ones. That's not necessarily the case. Daring foreign large-cap and world-stock funds tend to suffer oversized losses in sell-offs and considerable volatility overall. While Masters' Select International, Janus Overseas, and some other core international funds that delve fairly substantially into emerging-markets or small-cap issues have overcome the risks of such holdings and earned strong results over time, many such funds have not. And even the best of these bolder funds can be challenging to stick with because of their ups and downs.

For more conservative investors, moderate foreign large-cap and world-stock funds are a more appropriate choice. They tend to hold up reasonably well in downturns and experience limited volatility overall. Although many such funds are simply too reserved and have posted uninspiring long-term records, some are attractive and have earned strong risk/reward profiles over time. There are several prominent core international funds that fall in the latter camp, including Scout International UMBWX and American Funds New Perspective ANWPX. But others that fall into this camp have been overlooked by investors.

We thought it would worthwhile to provide introductions to three offerings from the foreign large-cap and world-stock groups that have delivered the goods with moderate strategies, yet still have a modest amount of assets.PAGEBREAK

Sentinel International Equity SWRLX
This foreign large-blend fund has well under $200 million in assets despite having several strengths. Manager Kate Schapiro has more than two decades of investment experience, primarily running foreign money, so she has seen a wide array of market conditions abroad. Schapiro's strategy combines top-down analysis with bottom-up research and favors blue chips from developed markets. She has produced solid returns with relatively modest volatility during her four-year tenure at this fund. The fact that she succeeded at a prior charge is another plus.

MFS Global Equity MWEFX
This world-stock fund's conservative bona fides are clear. It has regularly held up better than its peers in sell-offs, it has suffered significantly less volatility than its typical peers overall, and it boasts strong three-, five, 10-, and 15-year returns. Manager David Mannheim has been in charge of the portfolio since the early 1990s. Mannheim is a careful investor who focuses on well-established, higher-quality companies that have above-average but sustainable earnings growth and who is quite valuation-conscious. Nonetheless, this fund has just $445 million in assets. It deserves more attention from risk-conscious investors. (Mannheim and his team run USAA World Growth USAWX, which also has a modest asset base, in the same manner.)

Harding Loevner International Equity HLMIX
It's surprising that this foreign large-growth fund has just $330 million in assets. This fund held up quite well in the late-2007 to early-2009 meltdown and in most other sell-offs, and though it has lagged in certain surges, it has performed well enough in other rallies and in mixed conditions to earn good returns over the past decade. Its management team is deep and seasoned. And the team's high-quality and risk-conscious growth strategy is prudent and proven. (It has also worked well at other funds run by the firm.) Although this older, institutional share class has a $100,000 minimum investment, there is a newer, retail share class with a $5,000 minimum investment: HLMNX.

These funds are more reserved than most of their category peers and have good long-term prospects as well as other attributes. But they certainly aren't risk-free or immune to losses in tough times. And the huge gains that all types of international-stock funds have posted in the rally that began in March of this year aren't close to being sustainable. Thus, interested investors should make sure that they have realistic short-term expectations and long time horizons before they climb aboard any of these vehicles. 

William Samuel Rocco is a senior fund analyst at Morningstar.

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