The First Half in International Funds 2007

The first half of 2007 saw its share of tumult. Rising interest rates and the U.S. subprime loan crisis have roiled markets, and an exciting presidential election in France gained the world's attention, with one of the candidates promising to take the economy sharply to the left. Stock markets around the world fell sharply in late February and early March.

At the end of the June, though, what is most surprising is that the trends in 2007's first half on the international front are so similar to the trends for 2006. However, when we look at specific funds, we find that some noteworthy changes do add color to the picture.

The First Half in Global Markets
Once again, emerging markets have led the way. Latin American stock markets--which to a large extent means Brazil and Mexico--have had powerful returns, and so have many countries in emerging Asia. Even China's market continues to soar, despite government actions specifically designed to rein it in.

About the only difference in emerging markets relative to last year is that Russia and India, which both posted extremely strong gains in 2006, have slowed in 2007. In fact, this year they lag just about all the other emerging markets and most developed markets as well (though India's returns look more respectable in U.S. dollar terms.) In Russia, falling energy prices (at times) and concerns over the presidential succession weighed on stocks. In India, rising interest rates took the blame.

The first half of this year also echoed 2006 in the big European markets. Most of Western Europe's markets remained strong, and a slight gain in the euro versus the U.S. dollar (another continuation of a 2006 trend) added a further boost to returns from all those U.S-based foreign funds that don't hedge much or any of their currency exposure (in other words, nearly all of them).

By contrast, Japan's market has lagged again, just as it did in 2006. And its currency hasn't been any more popular. In fact, amid all the talk about the weak dollar, one can forget that the dollar actually gained against the yen in 2007's first half. Although the Japanese economy is showing encouraging signs, some investors still aren't fully convinced. A more specific problem--if one can call it that--is that takeovers are much more difficult to pull off in Japan. So the "takeover premium" that has pushed up so many stock prices in Europe and the United States is much less common in the Japanese market. Japanese small caps have been particularly weak.

The First Half in the Fund Categories
Among the broad foreign-stock style-box categories, we see another repeat of 2006. The smaller-stock-focused groups are again in front: The foreign small/mid-growth category has posted the biggest gain, with a 14.0% average return through June 28, with the foreign small/mid-value category a couple of percentage points behind. The foreign large-growth, large-blend, and large-value categories haven't been quite as strong, but they're showing healthy gains as well. What's most noteworthy about the large-cap groups is the lack of divergence between the three different style categories: All have posted returns right around 10%.

As for the more specialized categories, there are no surprises given the overall trends discussed above. The Latin America and Pacific ex-Japan groups have each racked up astounding half-year gains of greater than 20%, with the diversified emerging markets group in the midteens. Only the Japan category, with a basically flat first half, hasn't posted strong gains.

Aside from the big gains posted by emerging-markets funds, on the performance front another familiar trend took shape: single-country funds showing up at the top and bottom of the charts. Propelled partly by a strong Canadian dollar--which rose even more than the euro in the first half-- Fidelity Canada (FICDX) racked up a near-20% gain, while a number of Japan funds were in negative territory.

Fund News from the First Half
Meanwhile, several industry trends firmly established in 2006 also stayed in place. International funds continued to be big sellers in comparison to those that focus solely on the United States. Through May, in fact, the top three funds on the list of funds with the most net inflows were all international and were all familiar names:  Dodge & Cox International Stock  (DODFX),  American Funds Capital Income Builder (CAIBX), and  American Funds Capital World Growth & Income (CWGIX).

Not content to simply offer funds that already exist, fund companies noticing the interest in foreign investing continued to create new funds and ETFs. Some target specific regions or countries, but not all. One noteworthy new trend was the emergence of broader foreign index funds that include not just the MSCI EAFE countries--the traditional purview of international index-trackers--but also include emerging markets and Canada.

Among specific international funds, the most surprising news came from unexpected manager departures: Charles De Vaulx left  First Eagle Global (SGENX) and  First Eagle Overseas (SGOVX), leading to the equally surprising return of the esteemed former manager of those funds, Jean-Marie Eveillard. And Mark Madden left  Oppenheimer Developing Markets (ODMAX) less than three years after arriving there after a long and profitable run at Pioneer.

Two other departures were notable as well, but they weren't nearly as surprising. Bill Wilby of  Oppenheimer Global (OPPAX), who had stepped down a couple of years ago but was still running a domestic fund at that firm, and Gilman Gunn of  Evergreen International Equity  both retired after long, successful tenures at the head of those fine international offerings.