Adventurous, Successful Foreign Funds

One prediction Morningstar analysts have heard repeatedly from fund managers over the past few months is that future economic growth is likely to be more robust in developing countries than in the United States, Europe, and Japan. But investing in emerging markets typically requires enduring a lot of volatility (which can shake investors out of funds at the wrong time), and it wouldn't be prudent to simply give up on the developed world. For those reasons, a diversified foreign-stock fund that's willing to venture into emerging markets in a substantial way and boasts plenty of fundamentally appealing attributes can be a good way to get exposure to those areas.

In order to identify foreign funds that don't hesitate to look outside of their traditional hunting grounds, we fired up the  Morningstar Premium Fund Screener on Morningstar.com. We set the screener to seek out distinct portfolios of international funds that Morningstar fund analysts deem to be core holdings or supporting players in a portfolio (thus excluding volatile niche funds) and that have a recently published analysis. We also wanted funds that recently stashed at least 20% of their assets in emerging-markets stocks--but not more than 50%, in order to exclude funds that focus on emerging markets. Additionally, the screener was set to identify funds where the manager has been on the job for at least five years and outpaced two thirds of the fund's rivals over that span. Finally, we wanted only those funds with below-average expense ratios and a required minimum investment of no more than $10,000 that are open to new investors.

This screen yielded four funds as of March 1, 2010.  Click here to run the screen yourself.

 Columbia Acorn International (ACINX)
 Dodge & Cox International (DODFX)
 Masters' Select International (MSILX)
 Virtus Foreign Opportunities 

Dodge & Cox International, the biggest of these funds, in many ways invests just as much older sibling  Dodge & Cox Stock (DODGX) does. It's run by a sizable team of managers (a few are named managers on both funds) backed by a large staff of analysts and employs a straightforward value-oriented approach. It stumbled badly in 2008's sharp decline--the firm misjudged the extent to which the financial sector would suffer from credit and liquidity issues--but has delivered the goods since its 2001 inception, beating all but one of its foreign large-value peers over that span. The managers have consistently found value in companies within developing markets; the fund had a hefty stake in Latin America early on, but have since pared some of that back as they've found emerging markets in Asia and Europe more attractive. This tack has made the fund more volatile than most of its peers, but it's a fine holding.

The one fund in this group that doesn't focus on large caps is Columbia Acorn International. But although it has long invested primarily in small- and mid-cap firms and tends to own a substantial stake in emerging markets, the fund's returns haven't been turbulent on a relative basis. That's because managers Zachary Egan and Louis Mendes use an approach similar to that of  Columbia Acorn (ACRNX): They run a broadly diversified portfolio of more than 200 stocks and home in on companies that not only boast strong growth prospects, but are in good financial shape and sell at modest valuations. And since longtime manager Leah Zell retired in 2003, Egan and Mendes have extended the fund's record of success. Its smaller-cap mandate means it's not core holding material, but the fund works well as a supporting player.

Masters' Select International employs six topnotch subadvisors, each of whom runs 10%-20% of its assets and contribute eight to 15 stocks to the portfolio. The managers' investing styles run the gamut from deep value (David Herro of  Oakmark International (OAKIX)) to aggressive growth (Jim Gendelman of  Marsico International Opportunities (MIOFX)), and a number of them have a taste for emerging-markets firms. While the latter trait led to a hefty 59% loss in the October 2007-March 2009 bear market (which was in line with the foreign large-blend category), the fund has performed superbly over the long haul.

Rajiv Jain, manager of Virtus Foreign Opportunities since 2002, puts his own spin on so-called "quality growth" investing. Like most investors of that ilk, he focuses on companies with sizable market share and healthy balance sheets. But rather than filling the top of the portfolio with global behemoths, Jain--who also runs Virtus Emerging Markets Opportunities (HEMZX)--mixes in lesser-know fare such as Indian banks and utilities in Italy and Spain. And despite a 23% emerging-markets stake that's nearly double the category norm, the fund's emphasis on sturdy companies has made it much less volatile than its typical peer over the long term. It tends to lag in furious rallies such as 2009's, but the fund has outpaced 90% of its peers during Jain's eight-year tenure.

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