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The Year in International Funds 2011

The can't-miss markets finally missed, and other tales of woe.

Gregg Wolper, 01/03/2012

For many years, investors may have had concerns about sluggish growth in the United States, debt woes in Europe, and myriad issues in Japan. But faith in China and other big emerging markets, such as Brazil and India, ran deep. Surely those rapidly growing economies would keep the world's stock markets humming?

Not in 2011. The long-term growth stories remain enticing in emerging markets, and their stock markets may well return to their trend-beating ways. But last year served as a reminder that all rallies must pause at some point and that rapid rates of GDP growth don't necessarily translate into stock-price gains.

There was more to international-fund performance in 2011, of course. But the deep losses suffered by emerging-markets stocks did play a major role in the year's results.

The Categories, From Bad to Worse
It may come as a surprise to some readers that a discussion of emerging markets would lead this article. After all, wasn't the alarming and seemingly never-ending eurozone crisis the major global investing story of 2011?

It was. But in quite a change from most years, the international-stock-fund categories with the weakest returns for 2011 all focused on emerging markets. Starting with the worst performer, the most dismal international categories were China region, Latin America, Pacific/Asia ex-Japan, and diversified emerging markets. Their losses ranged from 23% for China region to 19% for diversified emerging markets. (Note: All figures for 2011 are through Dec. 27.)

Several factors account for this reversal of fortune. First, emerging markets had been on a roll, broadly speaking, ever since the end of the global bear market in March 2009. When worries about Europe and the United States resurfaced, in a sense it was natural that some investors would take profits where they'd gained the most, which for many meant emerging markets. Second, plenty of worries surfaced in the markets themselves. In India, fears of rising inflation combined with slowing growth rates and a plummeting currency. In China, concerns about a property bubble, government actions to actively rein in growth, plus some tentative challenges to the political order, weighed on investors' minds. And the possibility of a slowdown in China hit the resource companies that take center stage in Brazil's market. Finally, as will be discussed later, declines in emerging-markets currencies hurt fund returns as well.

That said, markets in Europe didn't exactly shine, and while Japan's market recovered somewhat from the dive it took after that nation's devastating earthquake and tsunami, it ended up firmly in negative territory as well. So, the main style box categories for international funds--foreign large growth, foreign small/mid value, and the like--all ended up with losses of between 12% and 17%, with the large-cap groups posting the milder declines. The Europe category landed in that range, too. Meanwhile, style didn't matter much: There were no significant performance differences between the value and growth categories.

All told, the international categories lost far more than did most U.S.-stock categories. The worst performer among the U.S. groups, the financials-sector category, had a much more moderate loss than those suffered by the emerging-markets groups, and all of the domestic style-box categories strongly outperformed their foreign counterparts.

Gregg Wolper is an editorial director and senior mutual-fund analyst at Morningstar.
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