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Foreign Fund Insight: Undiscovered Gems

Few investors have noticed these intriguing picks.

Brian Portnoy, 04/09/2003

<P>It's been a while since we've highlighted some of our favorite foreign-stock funds that have flown below most investors' radar screens. So we recently ran through Morningstar's database and found a fair number of offerings with small asset bases (less than $250 million) but very solid management teams and performance records. </P> <P>Three of our picks have long track records of success. Even though each includes either "growth" or "value" in its name, they've all proved themselves capable of performing well in both bull and bear markets. Each is a strong candidate for a core international holding.</P> <P>The other two picks, Artisan International Small Cap Inv <?XML:NAMESPACE PREFIX = MSTR /?><MSTR:SECURITY>ARTJX</MSTR:SECURITY> and Third Avenue International Value <MSTR:SECURITY>TAVIX</MSTR:SECURITY>, are different in a couple of important ways. They focus on foreign small caps--a corner of the global equity market that few U.S. investors are able to access outside of a mutual fund. Additionally, each is only about a year old. Although that fact might raise a question mark about management skill, each fund comes from a shop of veteran stock-pickers. Either fund is a nice way to diversify a U.S.-tilted portfolio.</P> <P><STRONG>Preferred International Value </STRONG><MSTR:SECURITY>PFIFX</MSTR:SECURITY></P> <P>Manager Peter Spano has run this offering since its June 1992 inception. Throughout that time, he has always taken valuations seriously, examining a stock's price multiples relative to the MSCI EAFE index's and the stock's own historical average. Stocks selling at the right price that also have the potential to grow earnings over time make the cut and usually stick in the portfolio for a while.</P> <P>At 43%, the fund's low turnover indicates a buy-and-hold approach. And with only 40 to 50 names in the portfolio--many of them relatively unknown mid-cap foreign companies--it's truly a stock-picking vehicle. Spano's record over the past 11 years is attractive. Of course, the fund's moderation didn't allow it to beat the pack in the late 1990s, but in most years, it has finished in the category's top ranks. Relatively low expenses are a plus.</P> <P><STRONG>Thornburg International Value A </STRONG><MSTR:SECURITY>TGVAX</MSTR:SECURITY></P> <P>This fund is also very eclectic. Manager William Fries, who also runs the successful U.S.-focused Thornburg Value <MSTR:SECURITY>TVAFX</MSTR:SECURITY>, has built a wide-ranging all-cap portfolio that moves throughout the equity universe. Indeed, it gravitated toward the mid-value style box in 1999 but currently lands in the large-growth box.</P> <P>No matter where it has landed, the fund has been a success: In its first four calendar years of existence, from 1999 through 2002, it notched top-quartile returns. The ability to excel in both growth- and value-led markets stems from Fries' willingness to assemble a concentrated portfolio that doesn't ape its rivals'. His lineup features a mix of blue chips such as BP <MSTR:SECURITY>BP</MSTR:SECURITY> and Novartis <MSTR:SECURITY>NVS</MSTR:SECURITY>, smaller fast-growing stocks, and a good-sized slug of emerging-markets issues.</P> <P>This bold, focused strategy has its risks--when some of the portfolio's bets go wrong, the damage could be big. But so far, compared with the competition, Fries hasn't missed a beat.</P> <P><STRONG>Evergreen International Growth </STRONG><MSTR:SECURITY>EKZBX</MSTR:SECURITY></P> <P>Though this fund also sports an all-cap profile, it's a more standard-looking foreign-stock vehicle. Well-known big caps top the portfolio, including Nestle <MSTR:SECURITY>NSRGY</MSTR:SECURITY>, Royal Dutch <MSTR:SECURITY>RD</MSTR:SECURITY>, and Toyota <MSTR:SECURITY>TM</MSTR:SECURITY>. It also holds more than 100 stocks, so it's more diversified than the previous two picks. But that doesn't mean smart stock selection isn't behind this fund's long-term success.</P> <P>Manager Gilman Gunn has been at the helm here since 1991 and follows a straightforward growth-at-a-reasonable-price philosophy. He doesn't typically shoot the lights out in any single year, but his steady management style makes this fund well-suited for an international core holding, despite its "growth" moniker. Indeed, with slightly above-average gains over a long period of time but low volatility due to a diversified lineup of well-established businesses, its risk-return profile is attractive.</P> <P><STRONG>Artisan International Small Cap </STRONG><MSTR:SECURITY>ARTJX</MSTR:SECURITY></P> <P>It's rare that we recommend funds with short track records. But in some instances a new fund can make a lot of sense, particularly when there's an experienced hand at the wheel.</P> <P>This offering is run by Mark Yockey, who won Morningstar's International Manager of the Year award in 1998. Yockey is a growth-oriented manager who reigned during the 1990s but managed to protect capital much better than his growth-focused peers during the market downturn. He now applies his price-conscious approach to a smaller-cap portfolio of 40 to 50 names.</P> <P>So far, so good. In 2002, the fund was well ahead of the pack. And with only $125 million in assets, the fund has the flexibility to invest in the relatively illiquid foreign small-cap market, which could mean good news for a while. There are major risks here, though. With a concentrated basket of volatile stocks, there's a lot of potential for some losses at times. A sky-high expense ratio also dampens the fund's appeal</P> <P><STRONG>Third Avenue International Value</STRONG> <MSTR:SECURITY>TAVIX</MSTR:SECURITY></P> <P>This fund is just as green but even smaller. Launched at the start of 2002 and holding only $33 million in assets, it needs time to prove itself. But what's attractive right out of the gates is that Third Avenue is now applying its vaunted value-oriented process to international markets. </P> <P>Manager Amit Wadhwaney doesn't have Yockey's impressive public record, but he has been a senior stock analyst and institutional account manager at Third Avenue for years. Like his colleagues, Wadhwaney is a value hound: He looks for companies trading at a substantial discount to either private market or liquidation value. But he and his team make sure a dirt-cheap firm also has a strong enough balance sheet to turn itself around.</P> <P>The portfolio is concentrated in 30 or so names, which showcases stock-picking ability, but also greatly increases the potential for a lot of short-term volatility. Its current bias is toward small caps, though its mandate allows it to buy larger fare if the opportunity is right.</P> <P>The rigor of the process here is what should draw investors' attention, but a stellar 16-month record doesn't hurt one bit. At 1.75%, annual expenses are high, but they're not out of line for a foreign smaller-cap vehicle.</P> <P><EM>Brian Portnoy is an analyst with Morningstar.</EM></P>


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