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Foreign Funds that Could Profit from the Global Sell-Off

They have what it takes to make the most of the opportunities.

William Samuel Rocco, 12/09/2008

International-stock funds have had a particularly terrible time of it in 2008. For starters, currency, valuation, and other factors have caused foreign-stock funds to suffer significantly more than their domestic-equity counterparts as markets around the world have tanked this year. Foreign large-growth funds have lost 8 percentage points more than the domestic large-growth norm of 42% for the year to date through Nov. 28, for example, while foreign small/mid-value funds have lost 15 percentage points more than the 36% decline suffered by small-value funds that generally stick to the United States.

What's more, emerging-markets funds have lost even more than those that focus on developed exchanges as a variety of local problems have surfaced in the developing world and investors have fled to quality. Commodity prices, which are crucial to many developing countries' economies, have tanked. Diversified emerging-markets funds have plunged 58% for the year to date through Nov. 28. Pacific Asia ex-Japan offerings have fallen around the same amount, and Latin America funds have declined a little more.

These losses are incredibly painful, but the global meltdown has also created some outstanding investment opportunities. Indeed, the damage has been so widespread and so severe that many stocks with solid fundamentals and good prospects have gotten crushed along with all those with genuine weaknesses and poor potential. This means that there are lots of exceptional long-term investments spread around the world at present.

Most international-stock managers lack either the talents or wide-ranging approaches necessary to take advantage of these far-flung opportunities. And many of those who have the right skills and the right strategies don't have the resources to do significant buying these days, as their funds have been beset by redemptions and thus have little if any cash to deploy. But the team at AIM International Growth, Rudolph-Riad Younes and Richard Pell of Artio International Equity II, and Amit Wadhwaney of Third Avenue International Value have the talents, approaches, and--at least as of quite recently--the cash to take advantage of this year's global sell-off.

AIM International Growth AIIEX
This foreign large-growth fund had a 12% cash stake as of Oct. 31. This means that its managers should have resources available to take advantage of any great investments that they find. Meanwhile, they make full use of the sector spectrum, consider mid-caps, and pay significant attention to emerging-markets issues as they search for high-quality companies with strong and sustainable earning growth, so many of the opportunities out there should be within their reach. And they've produced superior results this year and over time. These attributes, as well as the facts that the managers are more experienced and more valuation-conscious than most foreign large-growth skippers, make us confident that this fund can identify some long-term winners amid the current market mayhem.PAGEBREAK

Artio International Equity II JETAX
We believe this foreign large-blend fund has everything it takes to capitalize on 2008's turmoil. Rudolph-Riad Younes and Richard Pell are exceptionally seasoned and skilled. They've been at the helm of this fund's older sibling, Artio International Equity BJBIX, for 13 years, and they've produced topnotch short-, mid-, and long-term returns there. In fact, they were named Morningstar's International-Stock Managers of the Year for 2002. Moreover, they employ an eclectic approach that relies on top-down as well as bottom-up analysis and incorporates growth as well as value factors, and while they don't have quite as much market-cap leeway at this fund as they do at their older charge, they do pay ample attention to the mid-cap space and certain emerging markets here. Thus, Younes and Pell have quite a bit of freedom here. And they've put that freedom to excellent use so far. This fund had an 11% cash stake as of Oct. 31.

Third Avenue International Value TAVIX
This foreign small/mid-value fund had a 15% cash stake as of Oct. 31. Amit Wadhwaney is a talented money manager who searches far and wide for investments that meet Third Avenue's "safe and cheap" criteria. This fund, in fact, currently and normally sports sizable stakes in several smaller and less-popular markets, provides significant exposure across the market-cap spectrum, and owns a number of names that have been largely or completely ignored by other foreign stock offerings. Wadhwaney has executed this distinctive deep-value strategy well in this year's meltdown and in a variety of climates in the past, and the other Third Avenue skippers have done the same. Therefore, we think that this fund can take advantage of 2008's turmoil without taking on too much risk.

We have lots of confidence in these managers and their funds. But the funds certainly are not risk-free. Their year-to-date losses, though moderate in relative terms, are quite big in absolute terms, and they could well decline further before they enjoy a sustained rally, Thus, while we expect these funds to capitalize on this year's global sell-off and to post superior results over time, interested investors should be sure to approach them with their eyes wide open and take a long-term view. Finally, if they're shopping for taxable accounts, such investors should also note that it is distribution season and that each of these funds is expected to make a tiny income or capital gains distribution later this year. 

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