They have great long-term potential as well.
Some enthusiasts go so far as to say this is the best category. After all, the world-stock category has the inherent advantage of the widest possible opportunity set in equities. This leaves investors potentially free to seek their fortune across the globe, among developed as well as emerging markets, and along the entire market-cap spectrum. Thus, managers should be able to choose the best-positioned companies in any industry and seek better bargains elsewhere if any region becomes overheated. Moreover, the spread of trade and financial ties across continents has eroded the importance of where a company is domiciled because it could well be generating the bulk of its revenue abroad, so choosing investments on a global scale allows managers to break through some artificial boundaries.
The market downturn that started last year has indeed highlighted the category's advantage. World-stock funds' average 9% loss over the past year (through August 20) is virtually the best showing among all international categories and beats most diversified domestic-equity categories as well. The U.S. market has held up better in the downturn than most foreign bourses, which has benefited world-stock funds over their foreign category rivals. But the bigger playing field has also generally aided world-stock funds enough to get past many domestic categories. The category has fared better than comparable domestic and foreign categories over the past 10 years, and its 15-year trailing returns are competitive as well.
There are caveats, however. It's important to approach the category with a long-term mindset because it is over time that these funds' greater flexibility can realize their full potential. Also, investors who already own domestic and foreign funds need to choose carefully lest the addition of a world-stock fund causes too much overlap with their existing portfolio. And while there are some great managers in this space, the mix of strategies is understandably diverse considering the category's wide mandate. This again means investors need to be careful about finding the right world-stock fit given the style and other biases in their existing portfolio. Finally, it's especially important to ensure that the fund's management is capable of wielding the wide mandate effectively and has a firm grip on risk. The sheer variety of markets and securities worldwide means management needs to have expertise and research support to match.
Those words of caution in mind, let's look at a couple of funds that have fared well thus far in the downturn and also possess fundamental merits that make them great core holdings in general.
(Returns data for each fund below is for the one-year period through Aug. 20. The average world-stock fund shows a 9% loss for the period.)
We're excited about this new world-stock fund that debuted last June. The management team includes seasoned veterans Tom Marsico and Jim Gendelman, who have long, successful records at this boutique's domestic and international offerings. They assist lead manager Cory Gilchrist, who is a talented stock-picker in his own right. The team combines analysis of macroeconomic trends with thorough company-level scrutiny to identify winning industries and stocks. A concentrated portfolio of 50-odd stocks is the norm here, along with scant regard for benchmark country or sector weights. The portfolio's significant U.S. overweight relative to the category has played a role in the fund's success over the past year. But some shrewd stock picks have played an even bigger part. For example, top holding MasterCard
T. Rowe Price Global Stock
Manager Rob Gensler gave this previously unremarkable fund quite a spark when he took charge in 2005. (We made it an Analyst Pick soon after his arrival here.) Gensler's go anywhere mindset and his willingness to place substantial bets when he identifies companies with brilliant prospects within their industries has transformed what had been a fairly staid, diffuse portfolio of mostly blue-chip stocks. The fund's runaway success immediately following Gensler's arrival justified our confidence in his talent, but it admittedly coincided with a robust market rally suited to his style. So, it's especially encouraging to see the fund hold up admirably over the past year's market unrest. Smart picks such as top holding American Tower Corporation