Use this screen to find focused funds with stellar risk/reward profiles.
This article first appeared in the April/May 2011 issue of Morningstar Advisor magazine. Get your free subscription today!
Foreign equity funds don't tend to be as concentrated as their domestic counterparts. To illustrate, the median number of holdings for foreign large-cap funds clocked in at 115, which amounted to 51% more stocks than are typically found in a domestic-stock fund. As far as foreign core funds go, it's fair to say that even those with 50 to 70 holdings are on the concentrated side.
Although such funds aren't spreading risk across hundreds of tiny positions, that does not mean they are doomed to deliver a bumpier ride. This Morningstar Principia screen reveals some successful concentrated funds that have kept a lid on risk with a combination of in-depth stock research, deft security selection, and valuation discipline.
Special Criteria = Distinct Portfolios Only
And ( Morningstar category = Foreign Large Value
Or Morningstar category = Foreign Large Blend
Or Morningstar categroy = Foreign Large Growth )
And Total No. of Holdings < 80
And Purchase Contraints not= Closed-New Investment
And Analysis not= NA
To start, cast the net for all foreign large-cap funds that have 80 holdings or fewer. Then narrow the field to funds that are followed by Morningstar analysts.
And Manager Tenure > 10
And % Rank Cat 10 Yr < 25
Next, make sure at least one of the managers has been running the fund for 10 years or more. (In addition to helping find proven managers, this helps ensure that the core strategy has been consistent.) And set the screen to pull funds that have landed in the top quartile of their respective categories during the past 10 years.
And ( Morningstar Risk = Average
Or Morningstar Risk = Below Average
Or Morningstar Risk = Low )