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Why International Value Funds Are All Over the Map

This year's performance differences have many causes.

Gregg Wolper, 09/08/2009

International value funds aren't keeping up. Or are they? If you own one of these funds, or simply watch them as an informed investor, evaluating their performance in 2009 offers more than the usual challenge.

At times, you can simply see whether growth is beating value, for example, and that's that. At such times, all value funds will lag, and among the value group, those that lean more toward blend or growth will land at the top of that category's performance chart.

Not this year. The performance gap between value and growth for foreign funds is minimal. The explanations for performance are more complicated--and therefore more interesting.

On the Upside
One reason why the Dodge & Cox fund has rebounded so strongly this year after a poor 2008 is that the managers traditionally have invested much more of the fund's assets in emerging markets than their peers. That has had a huge impact, because even though the major markets have performed quite well in the rally this year, emerging markets have soared even higher. Check out the Russia funds topping the Europe-stock category. Even after a lousy couple of months opening the year, they now boast year-to-date gains ranging from 60% to 100% through Aug. 27. Or look at the emerging-Asia category, with its own fireworks prompting similar gains.

That helps explain why Templeton Foreign TEMFX is close to the top spot in the foreign large-value chart with a year-to-date return of 39.9%. Its managers have long been partial to Asia's emerging markets, in particular. As of June 30 the fund had about 20% of assets in those countries (not including Singapore and Hong Kong, typically classified as developed markets), plus another 5% spread among other emerging markets. The average emerging-markets weighting for foreign large-cap funds is only about 10% of assets.

But emerging-markets exposure is just part of the story for the outperformers. In general, small stocks have also topped bigger ones by substantial margins during this rally. That's helped Quant Foreign Value QFVOX, which after two painful years is zooming in 2009. (The fund is up more than 50% for the year to date, at the very top of the foreign large-value group.) It doesn't have a noteworthy emerging-markets weighting, but it does have one of the smallest average market caps in the foreign large-value category. But even that doesn't explain everything. Also pumping up this fund's returns: its commitment to some of the most beaten-up stocks, which had hurt it badly when the economy was tumbling but which have roared back to a stunning degree. Its British homebuilders have gains that measure well into triple-digit territory. (At least two of them have zoomed more than 200% this year.)

On the Other Hand
However, many other international value funds have not enjoyed such a bounty. That group even includes a few that like to own some smaller stocks. For First Eagle Overseas SGOVX, whose 13.6% year-to-date gain lags more than 90% of the foreign small/mid-value category, the explanation lies in caution. Riskier stocks have outperformed, and this fund didn't achieve its stellar long-term record by delving into dicey companies, preferring those with a substantial margin of safety. Moreover, it doesn't have a big stake in emerging-markets companies. And with capital preservation a key goal, it devotes more money to cash (more than 8% at the end of July) and gold-related holdings (12%) than most peers. All of these traits have held it back, in relative terms, after the first two months of 2009--just as they helped the fund stay ahead of nearly all competitors during the bear market.

The same combination of factors explains the laggard showing of IVA International IVIOX. That's not surprising, for this fund is managed by First Eagle alumni. IVA International, too, has money socked away in gold; had an even bigger cash stake at the end of July (20% of assets) than the First Eagle fund; and had an even smaller emerging-markets position. So it's not shocking that its 13.5% year-to-date gain also sits near the bottom of the foreign small/mid-value group.

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