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Fund Spy

The Foreign-Stock Funds in Morningstar's 401(k)

Great managers and low costs are available even overseas.

A few months ago, I walked you through the domestic-stock funds and bond funds in Morningstar's 401(k), and now it's time for the foreign-stock fund lineup.

We have five foreign-stock funds: three to cover the bases in the foreign-stock style box and two to cover emerging markets. While the three diversified foreign funds work nicely in concert together or in pairs, the emerging-markets funds are intended as an either-or choice.

In choosing our funds, we look for great management, a sound strategy, and low costs. You can't make quick changes to 401(k) funds for a number of logistical reasons, so that leads us to place extra emphasis on stable management. Let's take a look.

 Dodge & Cox International Stock (DODFX) provides great management at a reasonable price. Dodge & Cox has long been successful investing in the United States, and it has been able to translate that success overseas since launching this fund in 2001. In fact, Diana Strandberg and the rest of the managers at this fund have beaten the MSCI EAFE by more than 600 basis points annualized over the fund's existence. And they are charging just 0.64% to boot because they chose not to mark up their services just because they were investing overseas. We also like Dodge's management setup. It has multiple managers who are firm owners, so they tend to stay for their whole careers.

On the growthier side,  Vanguard International Growth (VWILX) is a model 401(k) fund. It rarely swings to extremes and instead just chugs right along. For a mere 0.34% expense ratio, you get a trio of strong subadvisors. Most of the assets are divided between James Anderson of Baillie Gifford and Virginie Maisonneuve of Schroder Investment Management with a sliver left over for Greg Aldridge and Graham French of M&G Investment Management. The fund seems to produce second-quartile returns nearly every year, but that takes them into the first quartile when you look at the long-term performance figures.

 Vanguard International Explorer (VINEX) provides the small- and mid-cap exposure for our foreign-equity lineup. Matt Dobbs of Schroder is an experienced veteran with 10 years at the helm and 30 years at Schroder. The fact that you can tap that experience for just 0.36% makes this fund one of the greatest bargains in the fund world. Fund companies tend to charge premium prices for foreign funds and for small caps; put them together and you have an explosion of overpriced funds--except for this one. The fund has a $25,000 minimum, so you'd need to have a decent-size portfolio for this to make sense. But if you do, I'd take a close look at this.

 American Funds New World (NEWFX) is our emerging-markets-light fund. Emerging markets have dramatic highs and lows, and that tends to lead to poor investor behavior as they buy high and sell low. That's why we like this toned-down angle on emerging markets. American buys developed-markets stocks in companies with lots of business in emerging markets in addition to direct investments in emerging-markets stocks and bonds. The three-pronged approach has produced excellent risk-adjusted returns, but you have to know going in that the fund will lag in emerging-markets rallies and outperform in sell-offs, as illustrated by its returns in 2008 and 2009. And the fund is also one of the cheapest actively managed emerging-markets funds around. (Our employees don't pay the front-load.)

 Oppenheimer Developing Markets (ODMAX) is the pure-play alternative to American Funds New World. Manager Justin Leverenz runs a bold growth-oriented fund that isn't tied down to index region or sector weightings. So far, he's made good use of that flexibility. His was the rare fund to produce top-quartile returns in 2008 and 2009. We opted for a pure play on emerging markets because our employees can choose to invest in one of two in-house automated fund-picking systems that can take advantage of that purity for asset-allocation purposes.

Poll Results
Last week I asked:

Who will win the NCAA Tournament? Here's how you voted. Let's hope Spy readers do better with this pick than their Super Bowl pick.

41% - Kansas
13% - Syracuse
21% - Kentucky
11% - Ohio State
14% - Duke

 

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