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Six International-Stock Manager of the Year Candidates

Three of the six leading candidates have won the award before.

William Samuel Rocco, 10/06/2009

International-stock managers have experienced wild conditions thus far in 2009. Ongoing weakness in the global economy, trouble in the financials sector, and other problems took a heavy toll on overseas equities this winter, and the MSCI All-Country World Ex USA Index plunged 24% between Jan. 1 and March 9 of this year. But economic gains in many countries, progress in a variety of sectors, and other positive developments gave foreign stocks a big boost this spring and summer. That index surged 74% from March 10 though Sept. 24.

Now that 2009 is three fourths over, it's an opportune time to see how the race for Morningstar's International-Stock Manager of the Year is shaping up. It's important to point out that we look for managers who have demonstrated ability over the years, have also thrived this year, and have what it takes to continue to shine, not flashes in the pan or those who are otherwise lacking. We therefore demand that all candidates have impressive long-term records and employ strategies that enhance their likelihood of future success. We're also seeking managers who have made money for lots of people and whose interests are aligned with those of their investors, so we insist that all candidates run funds that have ample asset bases as well as solid or better stewardship.

A half dozen foreign-equity managers stand out in these regards and thus are leading candidates to be International-Stock Manager of the Year. To be clear, though, these six managers are not the official nominees (those will be named in December). One or more of these front-runners could falter down the home stretch of 2009 or encounter other problems and fail to make the list of nominees. Conversely, one or more seasoned and skilled skippers could propel themselves onto the list by finishing the year strong. That said, here are the six leading contenders at present.

Three Former Winners that Could Repeat in 2009
The team at American Funds EuroPacific Growth AEPGX
The team has come through in a variety of environments since being named International-Stock Manager of the Year in 1999. The managers, who operate independently and follow a range of styles, stood above the crowd in the early 2000s' sell-off, in the multiyear rally that followed, and in awful 2008. And thanks to the strength of their emerging-markets, hardware, and other holdings, their fund is up 33% and leads fourth fifths of its foreign large-blend peers for the year to date through Sept. 24. Thus, their fund boasts top-decile returns for all trailing periods of three years or more, and it has suffered relatively moderate volatility along the way. The exceptional experience and depth of the team adds to its case, as does American Funds' history of treating fundholders well.

The team at Dodge & Cox International Stock DODFX
This team received the award in 2004 and is again firing on all cylinders this year after crashing in 2008's rough conditions. It elected to stick with a number of stocks that tanked last year, including Credit Suisse CS and other financial holdings as well as Lukoil LUKOY and other emerging-markets stocks. That commitment has paid off big thus far in 2009, as most of those names have rebounded quite sharply; this foreign large-value fund has earned a top-decile, 42% gain for the year to date. And this year's success is a far better indication of the team's abilities than last year's setback is. It consistently executed its moderately aggressive but very attractive discipline skillfully prior to 2008, so the fund's long-term returns are impressive. The fund's low costs and its family's excellent stewardship make the case for the team stronger.PAGEBREAK

David Herro and Rob Taylor of Oakmark International OAKIX
Herro (who won on his own in 2006) and Taylor (who became a comanager on this foreign large-value fund early this year) have a lot going for them. They employ a hard-core value strategy that causes their fund to stand out from the crowd and gives it ample opportunity to outperform. Their distinctive style has led them to a diverse mix of big gainers in 2009--including Signet Jewelers SIG and Publicis Groupe--so their fund has soared 49% and is near the top of its category for the year to date through Sept. 24. And though there have been some tough periods, Herro's decision-making has been on the mark far more often than not in the past. As a result, the fund has first-rate 10- and 15-year returns. What's more, Herro has earned good year-to-date and overall results at Oakmark International Small Cap OAKEX with the same stock-selection strategy, while Taylor has had short- and longer-term success at Oakmark Global OAKGX using the approach. The fact that Oakmark is a fundholder-friendly shop is another plus.

Three Other Skilled Skippers Who Could Win This Year
Brent Lynn of
Janus Overseas JAOSX
Lynn has once again demonstrated that his aggressive bottom-up approach has real merit and that he can implement it well. Lynn regularly builds distinctive sector weights and buys many emerging-markets stocks. He also likes exceptionally fast growers with high returns on capital, so the fund is more explosive than most of its foreign large-growth rivals. This approach can lead to marked underperformance, as occurred in 2008, when the fund's sizable stakes in the financials sector and the developing world sent it to its group's cellar with a 53% loss. That really stung, but Lynn stuck to his guns and added to several of his financials and emerging-markets holdings, thereby propelling the fund to a spectacular 69% gain for the year to date. And Lynn generally executed his bold strategy well during his first several years at the helm, so the fund boasts excellent returns since he came on board as a comanager in early 2001 and since he became the sole skipper in mid-2003. Although the fund's overall Stewardship Grade is solid rather than strong, Lynn's substantial investment in his strategy adds to his appeal, as does the fund's fetching expense ratio.

The team at Manning & Napier Worldwide Opportunities EXWAX
The team builds distinctive country and sector weights, pays ample attention to smaller caps, and runs a fairly compact portfolio of roughly 60 names as it looks for stocks that are trading at discounts to their fair values, so the fund normally differs significantly from most of its foreign large-blend peers. Meanwhile, the team has implemented its atypical approach adroitly in a wide variety of climates. The fund has posted top-decile results in this year's rebounding market just as it did in last year's meltdown, and it delivered much-milder-than-average losses in the early 2000s' sell-off and above-average gains in the multiyear rally that followed. As a result, the fund has an outstanding risk/reward profile. The depth and experience of the team enhances its candidacy, as does the success it has had on other Manning & Napier offerings.

Justin Thomson of T. Rowe Price International Discovery PRIDX
Thomson, who is one of the longest-serving managers in the foreign small/mid-growth category, has regularly delivered the goods. His fund has zoomed 49% and leads more than fourth fifths of its peers for the year to date through Sept. 24, as many of his picks in China, India, and elsewhere have flourished. He has frequently earned solid or better returns in the past--and has rarely posted poor results--so his fund has produced good long-term gains without suffering excessive volatility. What's more, the strategy behind that fine record does a nice job of mixing bolder traits with tamer characteristics, and it is similar to the approaches that have worked well at other international offerings from T. Rowe Price. There are ample grounds, therefore, to believe that Thomson can continue to come through. T. Rowe Price's commitment to treating fundholders well is another positive.

William Samuel Rocco is a senior fund analyst at Morningstar.

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