Investing Globally with American Funds

With less than two weeks left in 2007, every one of American Funds' five foreign- and world-stock funds has outperformed its U.S.-stock siblings. And in each of the previous four calendar years, at least four of those five funds has beaten out all of American's domestic-equity funds as well. Although I don't believe that investors should chase after hot-performing funds, I think this recent stretch of dominance by non-U.S. funds underscores the value of investing beyond our borders--not so much for returns that might have lower correlatation with those of U.S. stocks, but to gain more exposure to the many great businesses outside the U.S., as well as to other currencies. (One reason foreign stocks have recently done so well is the dollar's sharp decline relative to many major currencies.) What's more, I suspect that many Americans still harbor a home-country bias and could benefit from owning more foreign stocks. And finally, American Funds has a long history of investing globally, and it has amassed a lot of expertise in that area. So I'm taking a closer look today at the shop's global- and foreign-stock funds, with the caveat that their returns may cool relative to the firm's domestic-stock funds in the short term.

 EuroPacific Growth (AEPGX)
American Funds' only pure, diversified foreign-stock play, this fund invests heavily in large, blue-chip firms such as Swiss drugmaker Roche and French financial giant AXA. Its eight portfolio managers, who (like all of American's fund skippers) each run a portion of the fund independently, spread the portfolio across close to 300 holdings among them. And yet, spot-on stock-picking has resulted in a quite distinctive record; the fund has outpaced more than 95% of its foreign-large-blend rivals for the 10 years ended Nov. 30, 2007. And while the fund's growing, $125 billion asset base could possibly weigh on future returns, it's worth noting that the classic signs of asset bloat--such as an expanding holdings list, slowing portfolio turnover, and returns that cling to the category average--aren't in evidence here.

 Capital World Growth & Income (CWGIX)
This world-stock fund, like a number of American's equity offerings, heavily favors companies that pay out substantial dividends and have healthy balance sheets. On average, its nine managers gravitate to firms selling for relatively cheap valuations. Lately, they've found more bargains overseas; more than two thirds of the fund's equity stake has been in non-U.S. firms for the past three years, which has substantially boosted returns. The fund's value bias provided a healthy tailwind compared with its typical category rival from 2000 to 2006, but it has landed in the category's top half in less-friendly environments, too. Like EuroPacific Growth, this fund is huge, at $113 billion, but a broadly diversified portfolio, a longstanding emphasis on large caps, and low-turnover approach ameliorate size concerns. Also, the fund's 0.69% expense ratio makes it one of the cheapest broker-sold funds in its category.

 New Perspective (ANWPX)
Like Captial World Growth & Income, this fund invests across the globe, primarily in large, well-established companies ( General Electric (GE) and  Nokia (NOK), for example). However, this fund's skippers are willing to pay a bit more for companies with stronger profit-growth prospects, they don't have a dividend-oriented mandate, and they are quite willing to let their winners run. Thus, the fund tends to own more growth-oriented fare, such as tech, than its typical category rival or Capital World Growth & Income. That emphasis held the fund back for a few years prior to 2007, but it should pay off if growth's recent rebound continues. What's more, the fund's long-term record is excellent.

 Smallcap World (SMCWX)
This is one of the few world-stock funds that focuses on smaller companies. That appealing mandate--investors can potentially get all their small- and mid-cap exposure with one fund--along with solid performance and modest costs has led to strong inflows here; the fund has ballooned to nearly $26 billion (almost quadruple its size at the end of 2002). The fund's girth could make it tough to buy companies at the smaller end of the market-cap spectrum in the future. The fund recently stashed two thirds of its assets in mid- and large-cap stocks--in part because small caps are less appealing after a run of outperformance from 2000-06, but I also think it's an outgrowth of the fund's expanding asset base. The fund certainly has its virtues, but investors should keep their return expectations in check.

 New World (NEWFX)
A relatively tame fund in a very volatile category, this offering owns a mix of emerging-markets stocks, companies in more-mature markets that do significant business in developing countries, and emerging-markets debt. As a result, the fund has lagged its typical diversified emerging-markets peer in the strong rally by emerging-markets equities of the past five years. I think the fund holds a lot of fundamental appeal: It should hold up relatively well when emerging-markets stocks cool, and it possesses all the typical traits of an American Funds offering, including experienced management and modest costs. That said, even though it has lagged, the fund has gained an eye-popping annualized 29% for the five years ended Dec. 18, 2007, so I'd expect some turbulence here. Investors should either limit this fund's role to a small portion of their portfolio or get emerging-markets exposure through one of the more-diversified funds above.

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