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A Closer Look at One of 2009's Big Winners

A little research lets you go far beyond the numbers.

Gregg Wolper, 10/27/2009

Your conscience should sound a warning if you consider buying a fund simply because you see it on the list of this year's top performers. You can be excused for looking, though. How can you not be curious about funds posting year-to-date returns of more than 100% that don't even have "UltraBull" or "3.5X" in their names?

Because you're going to wonder about these funds anyway, here's a guide to help make those looks worthwhile. With just a little research, you can figure out why a chart-topping fund reaped such gains. More important, you can determine whether the fund is worth considering as a possible addition to your own portfolio or is so inappropriate that it can be struck off your list forever.

Let's examine one offering currently at the top of the rank: Oppenheimer International Small Company OSMAX.

The Story Unfolds
First things first: This fund is closed to new investors. But don't tune out; it's still worth a look. Closed funds often re-open when their asset levels decline, and this one is much smaller than it had been when the fund closed its doors in 2007. However, this is no tiny, obscure fund: It has $1.3 billion in assets and has been around for 12 years.

What catches the eye, though, is the fund's 121% gain for the year to date through Oct. 16. That's the best showing in the foreign small/mid-growth category by far. The second-place fund is up about 70%.

To figure out why, look first at Oppenheimer International Small Company's portfolio. Immediately, several numbers stand out. At the bottom of the page, you'll see that as of its May 2009 portfolio, the fund had a shocking 43% of its assets in Canada. Just behind Canada on the country list are Australia, India, and Norway--all with stakes of 9% or more. You don't have to be an international-investing expert to suspect something unusual is going on.

To confirm how odd this country breakdown is, check out the portfolio of a fund that tracks a broad small-cap international index, Vanguard FTSE All-World ex-US Small-Cap Index VFSVX. (Most international index funds track a more well-known benchmark, the MSCI EAFE Index, but that's a large-cap index that excludes Canada and emerging markets.) In the Vanguard fund's portfolio, the top two countries are the United Kingdom and Japan. Canada comes in third, with 12% of assets. Neither Norway nor India makes the top 10. The Oppenheimer fund truly is steering its own course.PAGEBREAK

The next step is to figure out what that means. For example, why is the fund in love with Canada? One way to learn is to look for unusual sector weightings to see if there's a connection. If you follow global investing, you may have already guessed one possible link. Three of the unusual weightings in the list of the fund's top-five countries--Norway, Australia, and Canada--all have stock markets tilted heavily toward commodities. Maybe the manager is making sector plays rather than country calls? Sure enough, that same portfolio page reveals that this fund has far more of its assets invested in the energy and materials sectors than most peers. With both of those sectors having soared even higher than most in this year's powerful rally, that alone could help explain the fund's rollicking 2009 performance.

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