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Smooth Operators

These foreign funds stayed calm in rough waters.

The market meltdown in 2008 and the sharp reversal that followed during most of last year have made for an exceptionally volatile three-year period for global equity funds. And in most cases, last year's strong returns haven't erased the pain of the sell-off. On average, foreign-large cap funds were down 44% in 2008 and gained 33% in 2009. So, the group averaged a loss of 6% per year for the past three years.

The 10-year picture for foreign large-cap funds is rosier but certainly not mind-blowing. That's because the trailing 10-year period now begins with the 2000-02 bear market (when many funds posted double-digit losses during each calendar year) in addition to 2008's downturn and excludes the red-hot gains of 1999. And so, the typical foreign large cap returned 1% per year during the past decade.

The Premium Screener can point to funds that bested that 1% annualized gain during the past 10 years and provided a smoother ride, particularly as markets have seesawed during the past three years. To begin, we focused on foreign large-cap funds that sport reasonable price tags. The screen is also set to pull funds that rank in the top third of their respective categories for the trailing three years and that sported lower volatility (as measured by standard deviation) than  Vanguard Total International Stock Index (VGTSX). This fund tracks a customized index that combines the MSCI indexes for Europe, developed Asia, and emerging markets.

The longer-term stress test starts with requiring 10-year annualized returns of 1% or more. Plus, manager tenure is set to 10 years or more to ensure that current management is responsible for the fund's performance during the entire time frame. In terms of risk, we narrowed it down to funds that have achieved low or below-average Morningstar Risk ratings. This measure assesses variations of monthly returns compared with similar funds over three-, five-, and 10-year periods, emphasizing investors' higher sensitivity to downside risk in the trade-off for returns.

The Premium Screener pulled four funds as of April 5, 2010, and the following three stand out. To run the screen yourself, click here.

While this fund's assets have climbed to more than $100 billion during the past decade,  American Funds EuroPacific Growth (AEPGX) has remained awfully nimble. True, the fund has shed an average of 0.8% during the past three years, but during the past decade it has averaged a 3.5% annual gain for fundholders. Its strong relative performance and below-average volatility are owed to the stock-picking of several portfolio counselors who run slices of the fund independently. Although the counselors run their portions of the fund independently, they tend to be longer-term-oriented with their picks (as evidenced by the fund's relatively low turnover), and price multiples tend to hug the category norms. The overall construction of the portfolio, which is typically well-diversified across sectors and countries, has also kept a lid on volatility.

James Moffett has skippered  Scout International  since its 1993 inception. During the past 10 years, this foreign large-blend fund sailed past its category average with its 4.8% average annual gain. (It lost an average of 0.29% each year for the past three years, though.) Moffett combines top-down and bottom-up analysis when building this portfolio, and he's cautious in his preference for industry leaders with sturdy balance sheets. He also treads gingerly in emerging markets and avoids Chinese and Russian firms altogether. Given the red-hot or ice-cold returns that firms from these countries have put up in the past three years, that stance has helped mute volatility. With the combination of a consistent process and Moffett's experience, the fund should continue to offer an attractive risk/reward profile for shareholders.

Like the other two funds on this list,  Tweedy Browne Global Value (TBGVX) posted strong relative returns in both 2008 and 2009, but it still shed an average of 2.7% annually during the past three years. That said, the typical foreign large-value fund lost more than twice as much. Managers William Browne, John Spears, and Tom Shrager look across the market-cap spectrum for stocks, but their penchant for steady growers with strong balance sheets has provided ballast for the fund when markets are reeling. They also hedge most of the fund's foreign currency exposure back to the U.S. dollar. This also tamps down volatility compared with funds that are subject to the swings of the euro, yen, and other currencies. Thanks in part to its subdued profile, the fund has returned 6.1% per year over the past decade. And its managers have proved that their process is sound for an even longer time frame.

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Karin Anderson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.