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Foreign Fund Insight: Six Foreign Funds We Still Like

Don't throw in the towel on these international standouts.

Bridget Hughes, 03/12/2003

<SPAN class=v12666666content> <P>Short-term performance swings are inevitable with all equity funds, and for the most part, they should be tolerated so long as longer-term results are acceptable. But when even three-year returns start to sour, it's natural for shareholders to get uncomfortable. /?></P> <P><SPAN class=v12666666content>And with international funds in particular, poor performance may be even harder to stomach. After all, these funds are often intended to diversify a portfolio, which should improve its overall risk profile--not aggravate it. /?></P> <P><SPAN class=v12666666content>Of course, investors should never put up with subpar performance for long; there are just too many compelling options out there. And investors should always work to keep their portfolios diversified, whether it's by using foreign-stock funds or REIT funds. In other words, investors may very well have reason to sell international holdings that have disappointed. /?></P> <P><SPAN class=v12666666content>Then again, there are some international funds that have suffered unexpectedly large losses in the past three years that we believe are well worth holding on to. /?></P> <TABLE cellSpacing="0" cellPadding="0" width=422 border="0" > <TD vAlign="bottom" align="left" bgColor="#999999" colSpan=6><FONT face="Trebuchet MS, Arial, Helvetica" color="#ffffff" size="-2" ><B>Three-Year Losers Worth Keeping</B></FONT></TD> <TD vAlign="bottom" align=right><IMG height="1" src="http://im.morningstar.com/im/dot_clear.gif" width=157></TD> <TD vAlign="bottom" align=right><IMG height="1" src="http://im.morningstar.com/im/dot_clear.gif" width=55></TD> <TD vAlign="bottom" align=right><IMG height="1" src="http://im.morningstar.com/im/dot_clear.gif" width="50" ></TD> <TD vAlign="bottom" align=right><IMG height="1" src="http://im.morningstar.com/im/dot_clear.gif" width=60></TD> <TD vAlign="bottom" align=right><IMG height="1" src="http://im.morningstar.com/im/dot_clear.gif" width=47></TD> <TD vAlign="bottom" align=right><IMG height="1" src="http://im.morningstar.com/im/dot_clear.gif" width=53></TD> <TD vAlign="top" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#999999 size="-2" ></FONT></TD> <TD vAlign="top" align=middle> <P><FONT face="Trebuchet MS, Arial, Helvetica" color=#999999 size="-2" ><B>3-Year<BR>Return (%)</B></FONT></P></TD> <TD vAlign="top" align=right> <DIV align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#999999 size="-2" ><B>3-Year<BR>Rank</B></FONT></DIV></TD> <TD vAlign="top" align="left" > <DIV align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#999999 size="-2" ><B>5-Year<BR>Return (%)</B></FONT></DIV></TD> <TD vAlign="top" align="left" > <DIV align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#999999 size="-2" ><B>5-Year<BR>Rank</B></FONT></DIV></TD> <TD vAlign="top" align="left" > <DIV align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#999999 size="-2" ><B>Expense<BR>Ratio</B></FONT></DIV></TD> <TD vAlign="top" align=right colSpan="7" ><IMG height=5 src="http://im.morningstar.com/im/dot_clear.gif" width=422></TD> <TD vAlign="top" align="left" ><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >Amer Cent Intl Discovery</FONT></TD> <TD vAlign="top"> <DIV align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >-26.82</FONT></DIV></TD> <TD vAlign="top" align="left" > <DIV align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >74</FONT></DIV></TD> <TD vAlign="top" align="left" > <DIV align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >1.68</FONT></DIV></TD> <TD vAlign="top" align="left" > <DIV align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#999999 size="-2" ><B></B></FONT><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >5</FONT></DIV></TD> <TD vAlign="top" align="left" > <DIV align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >1.45</FONT></DIV></TD> <TD vAlign="top" align=right colSpan="7" height=2><IMG height=3 src="http://im.morningstar.com/im/dot_clear.gif" width=422></TD> <TD vAlign="top" align="left" ><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" ><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" ><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >Amer Cent Intl Growth</FONT></FONT></FONT></TD> <TD vAlign="top"> <DIV align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >-27.04</FONT></DIV></TD> <TD vAlign="top" align="left" > <DIV align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >74</FONT></DIV></TD> <TD vAlign="top" align="left" > <DIV align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >-4.81</FONT></DIV></TD> <TD vAlign="top" align="left" > <DIV align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#999999 size="-2" ><B></B></FONT><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >32</FONT></DIV></TD> <TD vAlign="top" align="left" > <DIV align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >1.21</FONT></DIV></TD> <TD vAlign="top" align=right colSpan="7" height=2><IMG height=3 src="http://im.morningstar.com/im/dot_clear.gif" width=422></TD> <TD vAlign="top" align="left" ><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >Artisan International</FONT></TD> <TD vAlign="top"> <DIV align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >-25.89</FONT></DIV></TD> <TD vAlign="top" align="left" > <DIV align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >67</FONT></DIV></TD> <TD vAlign="top" align="left" > <DIV align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >1.68</FONT></DIV></TD> <TD vAlign="top" align="left" > <DIV align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >5</FONT></DIV></TD> <TD vAlign="top" align="left" > <DIV align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >1.21</FONT></DIV></TD> <TD vAlign="top" align=right colSpan="7" height=2><IMG height=3 src="http://im.morningstar.com/im/dot_clear.gif" width=422></TD> <TD vAlign="top" align="left" ><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >Liberty Acorn Intl Z</FONT></TD> <TD vAlign="top"> <DIV align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >-26.57</FONT></DIV></TD> <TD vAlign="top" align="left" > <DIV align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >71</FONT></DIV></TD> <TD vAlign="top" align="left" > <DIV align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >-2.14</FONT></DIV></TD> <TD vAlign="top" align="left" > <DIV align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >17</FONT></DIV></TD> <TD vAlign="top" align="left" > <DIV align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >1.06</FONT></DIV></TD> <TD vAlign="top" align=right colSpan="7" ><IMG height=3 src="http://im.morningstar.com/im/dot_clear.gif" width=422></TD> <TD vAlign="top" align="left" ><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >Putnam Intl Voyager A</FONT></TD> <TD vAlign="top"> <DIV align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >-29.10</FONT></DIV></TD> <TD vAlign="top" align="left" > <DIV align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >84</FONT></DIV></TD> <TD vAlign="top" align="left" > <DIV align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >1.16</FONT></DIV></TD> <TD vAlign="top" align="left" > <DIV align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >6</FONT></DIV></TD> <TD vAlign="top" align="left" > <DIV align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >1.54</FONT></DIV></TD> <TD vAlign="top" align=right colSpan="7" ><IMG height=3 src="http://im.morningstar.com/im/dot_clear.gif" width=422></TD> <TD vAlign="top" align="left" ><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >T. Rowe Intl Discovery</FONT></TD> <TD vAlign="top"> <DIV align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >-28.11</FONT></DIV></TD> <TD vAlign="top" align="left" > <DIV align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >80</FONT></DIV></TD> <TD vAlign="top" align="left" > <DIV align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >4.34</FONT></DIV></TD> <TD vAlign="top" align="left" > <DIV align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >3</FONT></DIV></TD> <TD vAlign="top" align="left" > <DIV align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >1.38</FONT></DIV></TD> <TD vAlign="top" align=right colSpan="7" ><IMG height=9 src="http://im.morningstar.com/im/422x9rule.gif" width=422></TD> <TD vAlign="bottom" align="left" colSpan="7" ><FONT face="Trebuchet MS, Arial, Helvetica" color=#999999 size="-2" >Data as of 03-10-03. </FONT></TD></TABLE> <P><SPAN class=v12666666content><STRONG>American Century International Discovery</STRONG> <?XML:NAMESPACE PREFIX = MSTR /?><MSTR:SECURITY>TWEGX</MSTR:SECURITY> /?></P> <P><SPAN class=v12666666content>For the trailing three years through March 10, 2003, American Century International Discovery is down 26.82% annually, on average, ranking near the foreign-stock category's bottom quartile. To be sure, this fund's emphasis on growth stocks has hurt, but because it invests primarily in small and mid-cap stocks (which have generally held up better than large caps through the downturn), we're a bit surprised by this disappointing showing. /?></P> <P><SPAN class=v12666666content>Digging deeper into performance, however, we find that most of the fund's weakness, compared with category norms, came in two quarters: the second quarter 2000 and  the fourth quarter of the same year. This divergence from the group highlights the fund's risks. Not only does it does it play in less-liquid, smaller-cap waters, its limited focus on valuations and penchant for sector bets make it riskier. Indeed, portfolio multiples are regularly above those of EAFE and the foreign-stock average, and the fund often ends up concentrated in just a few areas. All told, the fund has been one of the category's most volatile over time. /?></P> <P><SPAN class=v12666666content>However, it has also performed very well over the longer haul, landing in the category's top decile over the past five years. While it scored a super 88% gain in 1999's go-go market--loads of tech and telecom helped--it also notched impressive gains between 1996 and 1998, and again in 2002. Investors comfortable with the risks of this closed offering should stay put. /?></P> <P><SPAN class=v12666666content><STRONG>American Century International Growth</STRONG> <MSTR:SECURITY>TWIEX</MSTR:SECURITY> /?></P> <P><SPAN class=v12666666content>American Century International Growth isn't as unique within the category as its sibling--like many of its peers, it generally sticks to large caps in developed countries. Because there are similar funds with better short-term records out there, hanging onto this one after it's posted a near-bottom-quartile three-year return is a tougher sell. But it's still worth holding nonetheless. /?></P> <P><SPAN class=v12666666content>The fund's struggles during the bear market have stemmed from a series of disappointing stock picks. Sticking doggedly to its earnings-improvement approach, the fund has been attracted to stocks whose earnings improvements ultimately proved short-lived, including Danish pharmaceutical Novo Nordisk <MSTR:SECURITY>NVO</MSTR:SECURITY> and French industrial Saint-Gobain. Although the fund is quick to dump stocks that disappoint, it seemed to move from one trouble spot to another. After lightening up considerably in pharmaceuticals in mid-2002, it jumped into consumer-goods firms, including Diageo <MSTR:SECURITY>DEO</MSTR:SECURITY> and Reckitt Benkiser. Those stocks worked for a while, but have stumbled since. /?></P> <P><SPAN class=v12666666content>But the fund's discipline, its experienced--and growing--investment staff, its strong long-term performance record, and its below-average expense ratio continue to recommend the fund. The fund also just tacked on a 5.75% front-end sales charge, so investors getting out now would be required to hire a financial advisor and pay this load fee to get back in. /?></P> <P><SPAN class=v12666666content><STRONG>Artisan International</STRONG> <MSTR:SECURITY>ARTIX</MSTR:SECURITY> /?></P> <P><SPAN class=v12666666content>Four years ago, Morningstar named Artisan International manager Mark Yockey its International Fund Manager of the Year, and we're not giving up on him yet. Since Yockey launched the fund in late 1995, it has proved to be one of the foreign-stock category's best performers. /?></P> <P><SPAN class=v12666666content>That's not to suggest that the fund is risk-averse, however, as evidenced by its above-average volatility compared with the category, and its weak performance lately. The fund has performed quite poorly over the past nine months in particular, largely because of its devotion to European insurance stocks, which have been hammered lately, as well as some other picks gone bad. /?></P> <P><SPAN class=v12666666content>Don't expect those insurance stocks to disappear from the fund anytime soon: Indeed, Yockey added more recently, and the fund's turnover rate is low, especially when compared with other foreign-stock growth funds'. But as Yockey has shown over the longer haul, his intuitions are usually on the mark. /?></P> <P><SPAN class=v12666666content><STRONG>Liberty Acorn International</STRONG> <MSTR:SECURITY>ACINX</MSTR:SECURITY> /?></P> <P><SPAN class=v12666666content>This fund boasts a consistent record of above-average performance, an experienced manager, and extremely low costs. Its approach is also somewhat uncommon: Manager Leah Zell buys small-cap companies, which can often better diversify U.S.-focused portfolios. This profile makes it one to keep. /?></P> <P><SPAN class=v12666666content>Still, its bottom-third 26.57% annualized loss over the past three years is disappointing. But like American Century International Discovery's, the fund's poor showing is primarily a function of two bad quarters in 2000, when small-growth companies suffered. /?></P> <P><SPAN class=v12666666content>We're also encouraged by Zell's reaction to the tough markets. Although she hasn't abandoned her growth stripes, she has constructed the portfolio more conservatively, upping the number of names in the portfolio. She has also devoted more of the portfolio to firms with sound finances and good cash flow generation. In short, we think Zell is looking out for the best interests of shareholders--even if it means a slightly modified strategy. /?></P> <P><SPAN class=v12666666content> /?><SPAN class=v12666666content><STRONG>Putnam International Voyager</STRONG> <MSTR:SECURITY>PNVAX</MSTR:SECURITY> /?></P> <P><SPAN class=v12666666content>Of all the funds on this list, Putnam International Voyager looks the worst on a trailing three-year basis: It has shed an annualized 29.1%. This small-to-mid-cap fund's problems came early in the bear market, but the damage was brutal: It lagged the average foreign-stock fund in every quarter between April 2000 and December 2001, losing nearly half its value in that 21-month period alone, as a number of its picks headed down. /?></P> <P><SPAN class=v12666666content>Since then, however, it has looked much better, performing a bit better than its average peer (though its year-to-date loss in 2003 is dramatic). And as the markets have soured, the fund has picked up a number of traditional growth stocks, including tech names, which should make it better poised for a market rally. /?></P> <P><SPAN class=v12666666content>More importantly, the fund has outdone its smaller-cap foreign-stock competition in a variety of markets, and its five-year return is among the overall foreign-stock cateogry's best. The fund's management team is experienced, and Putnam's analyst bench is deep. /?></P> <P><SPAN class=v12666666content><STRONG>T. Rowe Price International Discovery</STRONG> <MSTR:SECURITY>PRIDX</MSTR:SECURITY> /?></P> <P><SPAN class=v12666666content>Like American Century International Discovery, this fund is closed, so getting out now means getting out for good. But longtime shareholders aren't likely thinking of leaving anyway: The fund's 4.34% annualized five-year return, while meager in absolute terms, lands ahead of 97% of its foreign-stock rivals and bests the majority of its smaller-cap rivals'. /?></P> <P><SPAN class=v12666666content>While the fund's five-year record makes its horrible three-year loss a bit easier to swallow, that 28.11% annualized loss over the past three years still hurts. As was the case with the other smaller-cap funds, 2000's second and fourth quarters were particularly hurtful, but this fund also lagged its rivals for the better part of 2001 into 2002's first quarter, as a commitment to tech and health care dragged the fund down. /?></P> <P><SPAN class=v12666666content>The fund definitely shines in bull markets, as its 155% return in 1999 attests, but it has also worked reasonably well for a smaller-cap option in less-robust markets. That said, this one does require some patience. /?></P> <P><SPAN class=v12666666content><EM>Bridget Hughes is a senior analyst with Morningstar.</EM> /?></P>

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