Have these funds lost their luster?
Foreign large-cap funds encountered pretty favorable conditions overall in 2013. Granted, most of the world's emerging markets posted modest declines, and a few major ones, including Brazil and South Africa, suffered significant losses this year. Some developed markets, such as Canada and Australia, earned only modest gains. But the Japanese exchange, which is by far the largest in Asia and which makes up approximately 15% of the non-U.S. market capitalization, returned 26% for the year to date through Dec. 26. And European markets, which comprise nearly half of the equity universe outside the United States, gained 23% on average, led by the two biggest exchanges on the continent, France and Germany. All told, the typical foreign large-value fund returned 19% for the year to date through Dec. 26, while the typical foreign large-blend fund gained 18% and the average foreign large-growth fund returned 17%.
As would be expected, a number of topnotch foreign-stock funds thrived in this rather auspicious climate. For example, MFS International Value MGIAX, which has a Morningstar Analyst Rating of Silver, gained 7 percentage points more than the foreign large-value norm, thanks to the strengths of its managers' picks in Japan and the United Kingdom, particularly the telecom powers KDDI KDDIF and Vodafone VOD. And Silver-rated Oppenheimer International Growth OIGAXreturned 6 percentage points more than the foreign large-growth average, as a plethora of manager George Evans' European holdings flourished, including the Netherlands' Aalberts Industries AALBF and Germany's United Internet UTDI.
But a trio of Silver-rated foreign stock funds--AllianzGI NFJ International Value ANJIX, First Eagle Overseas SGOVX, and Virtus Foreign Opportunities JVIAX--failed to capitalize on 2013's generally positive conditions and posted relatively paltry gains. These three funds are pretty prominent as well as highly rated, so it makes sense to assess why they struggled and whether their long-term merits remain intact.
AllianzGI NFJ International Value ANJIX
A couple of factors undermined this foreign large-value fund in 2013. First, it had roughly triple the category average of 7% invested in the anemic developing world all year, and a lot of that exposure was in especially weak emerging markets like Brazil, Turkey, and South Africa. Second, it carried a bigger stake in the struggling basic-materials sector than most of its peers, and some of its precious-metals and other picks in that space tanked. (Yamana Gold AUY, which was the number-nine holding as of Nov. 30 and a major holding all year, plunged more than 40%.) As a result, this fund gained 10 percentage points less than the category average of 19% and landed in the group's worst decile for the year to date through Dec. 26.
That underperformance, painful as it may be, needs to be placed in the proper context. The team that runs this fund has always paid considerable attention to emerging-markets opportunities and readily built distinctive country and sector weightings as it has pursued attractively valued dividend payers. The team executed their dividend-oriented discipline deftly in all rallies and some but not all sell-offs prior to 2013, and this fund has outpaced all other foreign large-value offerings--and surpassed the category average by 4 percentage points annualized--since opening in early 2003. Meanwhile, the team is quite seasoned and strong, and it has delivered the goods at other funds using a similar approach.
First Eagle Overseas SGOVX
Geography wasn't the problem for this fund in 2013. It had a rather average emerging-markets stake and a very heavy Japan weighting all year. However, this fund held roughly twice as much exposure to the struggling basic-materials sectors as its typical foreign large-blend rival throughout 2013; a good portion of that exposure was in cratering gold miners; it also held some gold bullion directly. Its three largest gold stocks--Goldcorp GG, Newcrest Mining NCM, and Agnico Eagle Mines AEM--plummeted roughly 35%-70%. What's more, this fund carried a cash stake of approximately 20% of assets all year, which was quite a burden in rising markets. Consequently, this fund returned approximately 7.5 percentage points less than the category average of 18% for the year to date through Dec. 26, lagging 94% of its peers.
That result is upsetting, of course, but the traits that slowed this fund in 2013 are key components of its strict discipline. Abhay Deshpande, Matthew McLennan, and Kimball Brooker are commited to capital preservation above all else. Toward that end, the managers only invest in stocks--and certain bonds--that are trading well below their intrinsic values and thus have significant margins of safety. They have also tended to hold substantial cash stakes, especially when there's a dearth of attractive bargains. Finally, they generally devote 5%-10% of the portfolio to gold stocks and bullion for protection from market meltdowns.
Thanks to its considerable reserve, this fund has held up exceptionally well in sell-offs and has been one of the least volatile foreign large-cap funds around. Though it has posted subpar gains over the trailing three- and five-year periods--due to its generally sluggish results in the rallies of recent years--its longer-term returns are good. And the managers' overall skill set also inspires confidence.