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Frequent Fliers

Offerings from Oberweis, Rainier, and Seafarer are proving even small funds can be competitive when it comes to picking stocks across the globe.

Rob Wherry, 12/10/2013

This article originally appeared in the December/January 2014 issue of MorningstarAdvisor magazine. To subscribe, please call 1-800-384-4000.

Andrew Foster is used to spending hours on a plane as he searches the globe for stocks he believes are undervalued. A recent 10-day trip spanned more than 15,000 miles as he visited with more than a dozen management teams in Mumbai and Hong Kong. Only a typhoon kept him from traveling to mainland China. Such due-diligence trips are routine for Foster, who launched emerging-markets fund Seafarer Overseas Growth & Income SFGIX in 2012 after almost a decade of successfully guiding offerings at Matthews International Capital, the parent firm for the Matthews Asia funds.

"You want to make sure reality matches your analysis," Foster says. "It's worth the trip if you come back with one good idea."

Foster and peers such as Ralf Scherschmidt of Oberweis International Opportunities OBIOX and Henrik Strabo of Rainier International Discovery RISAX are part of a cadre of managers running small funds that are trying to keep pace with their bigger brethren in Morningstar's international fund categories. Their funds may not have the long performance records of, say, Gold-rated Oakmark International OAKIX. But the managers have proven themselves at their current funds and previous charges. Indeed, the Seafarer and Rainier funds were in the top quintile of their respective peer groups in 2013, while Oberweis International Opportunities' 55% gain last year was tops in the foreign small/mid-growth category.

These managers, though, have their work cut out for them. The old adage is that investors should pay up for international managers because they can exploit local market inefficiencies. A good manager with analysts on the ground can find attractive stocks long before others do. To that end, J.P. Morgan has an annual research budget that surpasses $100 million. T. Rowe Price has 12 experienced analysts that just focus on the Middle East and Africa. By comparison, Scherschmidt has four analysts--for the entire globe.

Another obstacle to contend with is a series of index mutual funds and exchange-traded funds that allow advisors to get more focused coverage to a certain region or country and different-sized companies within those areas. For example, Vanguard FTSE Emerging Markets VWO and iShares MSCI Emerging Markets EEM, two of the five largest ETFs, hold a combined $97 billion of total assets. Investors can also purchase international ETFs that focus on emerging-markets small caps, dividend payers, and bonds. Emerging-markets factor-based ETFs are also emerging. Active managers must duel with these funds for assets.

"There is a value-add for sure for [an active manager], especially in a market that is hard to focus in on," says Dave Stock, chief investment officer of Rainsberger Wealth Advisors in Colorado Springs, Colo. Stock uses a mix of active funds, index funds, and ETFs in his practice. "At some point we are vehicle-agnostic," he says. "But it's a good overlay to have some active management."

Foster, Scherschmidt, and Strabo must also navigate a shifting international investing landscape. Emerging markets were key performance drivers the past decade as demand for commodities and infrastructure projects led to robust economic growth.

Rob Wherry is a mutual fund analyst with Morningstar.

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