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International Funds: Third Quarter Wrap-Up

Events in the Chinese market took center stage.

To anyone following the financial news, it won’t come as a surprise that the performance of China stood out among global stock-market results in 2021’s third quarter. The effect that the September crisis at real estate giant Evergrande Group had on bond markets received the most recent attention, but the third quarter was a turbulent time for stocks in that country as well.

For one thing, Evergrande’s problems stoked fears of a broader property-sector crash, with subsequent effects on the whole Chinese economy. Of more direct impact on China’s stock market were actions by the Chinese government that appeared aimed at well-known technology and communications companies. In addition, the government imposed new rules that led to popular online-education firms having their entire business models effectively wiped out, as the guidelines imposed drastic restrictions on their activities. From July 1 through Sept. 28, 2021, the MSCI China Index plunged 18.6%, with Alibaba’s (BABA) 32.8% decline and Tencent’s roughly 20% loss supplying much of the fuel.

Naturally, China-specific offerings suffered from this turmoil. The only fund in the China region Morningstar Category with a Morningstar Analyst Rating of Gold, Matthews China (MCHFX), declined 13.2%. That was less than the MSCI China Index though a bit worse than the category average. But a less obvious victim of China’s tumult was Davis International (DILYX) (and many of its siblings). Although Davis International’s mandate covers the whole world outside the United States, manager Danton Goei has elected to feature Chinese stocks prominently, including hefty exposure to those online-education firms. The fund lost 17.3% in the quarter through Sept. 28, nearly 16 percentage points worse than the foreign large-blend category average.

With the China market dominating emerging-markets indexes, its deep decline, along with substantial downturns in Brazil and Korea, made for a treacherous quarter for diversified emerging-markets funds, though two other big emerging markets, India and Russia, fared well. The diversified emerging-markets stock category average fell 6.7%, significantly worse than the three foreign large-cap categories, which had mild losses of between 0.9% and 1.5%. Faring slightly better were the foreign small/mid-cap value, blend, and growth categories. The first two were essentially flat, while the foreign small/mid-growth group rose 1%.

Among the quarter’s outperformers were several Fidelity offerings in the foreign large-growth category that are Morningstar Medalists. All are led by managers with lengthy tenures and solid track records. Although that category average was 0.9% in the red, Fidelity Diversified International (FDIVX) and Fidelity International Discovery (FIGRX), run by Bill Bower and Bill Kennedy, respectively, each posted gains of about 2% for the quarter through Sept. 28. Fidelity International Growth (FIGFX) and Fidelity International Capital Appreciation (FIVFX) , managed by Jed Weiss and Sammy Simnegar, respectively, posted smaller but still slightly positive returns. These managers all rely on the same large corps of Fidelity analysts but make their own decisions on the construction of their portfolios.

Weiss’ other fund, Fidelity International Small Cap Opportunities (FSCOX), fared even better; its 6.2% gain topped the foreign small/mid-growth category average by 5 percentage points. That fund is ahead of the group by a similar amount for the year to date, a welcome rebound from a 2020 when it lagged the category average by more than 8 percentage points.

By contrast, one of the most prominent international-stock funds, Oakmark International (OAKIX), suffered a reversal in this year’s third quarter. That strategy had been on a tear from the bottom of the pandemic-induced bear market in early 2020 through mid-2021. But it lost 4.4% in the third quarter through Sept. 28, well below the foreign large-value norm, as the types of stocks it prefers fell out of favor—not an uncommon occurrence with that up-and-down, but ultimately very successful, fund.

Gregg Wolper does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.