Find Foreign Funds Treading Lightly in Emerging Markets

In equities' steep plunge from October 2007 through the most recent trough of March 9, 2009, as well as the ensuing rebound, non-U.S. stocks have been even more volatile than their U.S. counterparts: They fell further, and they've since rallied harder, in part due to currency movements. Emerging-markets stocks have provided an especially wild ride. When investors grew fearful that those faster-growing economies would be severely impacted by the global recession, the typical diversified emerging-markets fund lost a stomach-churning 62% in the downturn. As optimism has returned, the funds have since soared 60%.

The turbulence of emerging markets may make investors wary. And although nations such as China, India, and Brazil may indeed boast stronger economic growth in the coming years than the economies of, say, Western Europe, enthusiasm for emerging-markets stocks has returned so quickly that they may have come back too fast and too far. Risk-averse investors might do well to seek out a core foreign-stock fund that doesn't bet big on emerging markets; it can still provide exposure to a broad range of excellent companies outside the U.S. (some of which will benefit if emerging markets do deliver on their expectations).

In order to find a fund that fits the bill, we used Morningstar's Premium Fund Screener tool on Morningstar.com. We searched for distinct portfolios within Morningstar's three foreign large-cap categories (foreign large-blend, foreign large-growth, and foreign large-value) that required an initial investment of $10,000 or less; we also screened out funds with limited availability by requiring a minimum investment of greater than zero. We also wanted funds where the manager had been on board for at least five years and outpaced a minimum of two thirds of category peers over both 12 months and five years. We wanted funds with expense ratios less than or equal to their category averages. Finally, we sought out funds that recently stashed less in emerging-markets stocks than their typical category rivals.

Here are the results as of June 15, 2009. Click here to run the screen yourself.

Hartford International Opportunities (IHOAX)
Morgan Stanley International 
 Oppenheimer International Growth (OIGAX)
 USAA International (USIFX)

Oppenheimer International Growth doesn't own a big slug of emerging-markets companies at the moment (9% of assets), but it's far from tame. Longtime lead manager George Evans doesn't pay much attention to his benchmark, the MSCI EAFE Index, when constructing the portfolio. Instead, exposure to sectors and regions is determined by which companies best fit his long-term investment themes and have solid long-term growth prospects (for which he's willing to pay up). It's worth noting that the fund has had a bigger stake in emerging markets in the past, but Evans has kept the fund from being too volatile. He's also generated excellent long-term results.

Taking a more conservative tack, the managers of USAA International prefer companies that churn out relatively steady streams of revenue. Thus, the fund tends to hold a number of giant consumer-goods makers and industrial conglomerates based in Europe, such as Nestle, Diageo, and Bayer. (The fund recently had 6% of its assets in emerging markets.) It's one of the least-volatile foreign large-growth funds around, and since David Mannheim and Marcus Smith took the helm in mid-2002, it's outpaced 70% of its category rivals.

Don't have a Premium Membership? You can still use our Premium Fund Screener by taking a free, 14-day trial.