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Three Foreign Funds That Have Sailed 2009's Stormy Seas Skillfully

These foreign large-cap funds have real merit, but they're certainly not tame.

William Samuel Rocco, 07/28/2009

The climate for foreign large-cap funds has been just as tempestuous as it has been for domestic large-cap offerings thus far in 2009. The year started off quite poorly. The weakness in the global economy, crisis in the financials sector, decline in consumer confidence, and other difficulties that pelted foreign as well as U.S stocks in 2008 continued to wreak havoc on equities though early March of this year. As a result, nearly all overseas stock markets tanked. The FTSE All World ex-U.S Index sank 25% between January 1 and March 9 of this year.

But that terrible winter has been followed by a very nice spring and early summer. Thanks to the slowdowns in the rates of decline of certain economic variables, along with genuine progress in the financials sector and positive news in other areas, many investors became less pessimistic if not optimistic about the short- to mid-term future. Those developments, plus the abundance of striking bargains, led to a renewed interest in stocks around the world along with a renewed willingness to take on risk. Thus, the FTSE All World ex-U.S Index has gained 50% between March 10 and July 16.

Foreign large-cap funds have also faced other challenges this year. There has been a great deal  of variation in the performance of markets. Latin America markets have soared 47% on average while European exchanges have risen only 10% on average. The India market is up 52% whereas the Japanese exchange is down 1%. There's also been quite a bit of sector rotation, as several that held up well in the turbulent conditions that prevailed early in 2009 have disappointed since. The consumer staples sector posted relatively limited losses in the winter storm but has posted subpar gains in recent months, for example, while the financials sector, which plunged more than 40% through March 9, has almost doubled since.

However, rough as the international seas have been this year, there are foreign large-cap funds that have managed to navigate them deftly. Many of the funds that are faring well don't have a lot else going for them. But some of this year's leaders are quite attractive overall. Here are the scoops on three terrific foreign large-cap funds that have delivered the goods this year.

Two Skilled Value Hounds Come Through
While the average foreign large-value fund has zigzagged its way to a 9% return in 2009, Oakmark International OAKIX has zoomed to a 25% gain. David Herro and Robert Taylor--the latter is a longtime contributor on the fund who became a comanager in January--focus on just 45 to 55 names as they pursue stocks trading at big discounts to their estimates of intrinsic value. Thus, each of their picks really counts, and their stock selection has been excellent of late. Signet Jewelers SIG--which was a 2% position at the end of 2008 that they added to on weakness this winter--has skyrocketed in recent months due to solid same-store sales and effective cost-cutting. That stock is up 146% this year. Many of Herro and Taylor's other holdings also have posted hefty gains, such as Credit Suisse CS and some other financial stocks. The issue concentration and other bold aspects of their strategy, such as a willingness to buy stocks in bunches, have stung at times. But Herro and his team have generally put his fairly aggressive strategy to good use. The fund boasts first-rate three-, five, 10-, and 15-year returns.

Dodge & Cox International Stock DODFX is a hard-core value shopper. Its managers look for stocks that are cheap on a variety of metrics and have good fundamentals, and they take a patient, contrarian approach. They don't hesitate to load up on issues in individual sectors, and they pay ample attention to emerging-markets opportunities. These characteristics backfired in awful 2008. (The managers added to their already sizable stake in the struggling financials sector before it went from bad to worse, and their oversized position in emerging markets hurt when those markets fell especially hard.) But these same traits have been a boon in 2009. The managers have stuck with several financial issues that have rebounded sharply and kept more than 20% of the portfolio invested in emerging-markets stocks--and such issues have led the spring and early summer surge--so the fund has returned an impressive 20% for the year to date. The managers' stock selection and overall decision-making were generally on target prior to 2008, and the fund has a topnotch long-term record.

A Racy Foreign Large-Growth Vehicle Leads the Pack
Janus Overseas JAOSX has roughly tripled the 14% year-to-date gain of the typical foreign large-growth offering. Brent Lynn, who came on board as a comanager at the end of 2000 and assumed sole control of the portfolio in mid-2003, has accomplished that feat by sticking to his guns. Lynn is dedicated to fast-growing firms that can continue to earn strong returns on invested capital, believes in concentration, and pays lots of attention to companies in the developing world that meet his standards. He used the late-2008 turmoil to add to the fund's already sizable stakes in Research in Motion RIMM and other tech-related stocks as well as Petrobras PBR and other emerging-markets names. Research in Motion is up 78%;  Petrobras is up 63% in 2009; and many of his other tech-related and emerging-markets picks have posted big gains. Of course, Lynn's high-growth tastes, focused approach, and penchant for building substantial emerging-markets positions come with real risks, and those traits led to the fund's terrible showing in 2008's meltdown. But there's no arguing with Lynn's overall returns. The fund has the best returns by far of any foreign large-growth offering since he came on board as comanager and since he became the sole skipper.

These three funds are great long-term options, but investors should be sure to understand that they're definitely not conservative offerings. Oakmark International and Dodge & Cox International are both bolder than the typical foreign large-value fund. And Janus Overseas is far more aggressive than the average foreign large-growth offering and ranks as one of the most daring foreign large-cap offerings around. Thus, the first two require some tolerance for volatility, and Janus Overseas demands an exceptional stomach for risk.

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