Keep the Short-Term Returns of These Overseas Funds in Perspective

There has been some turbulence along the way, but the vast majority of overseas large-cap stocks have soared since the world's equity markets reached their most recent nadir in early March 2009. European and most other developed-markets blue chips have posted hefty gains, in fact, while most emerging-markets issues have earned huge returns, and big firms from across the sector spectrum have produced impressive results. As a result, the average foreign large-value, foreign large-blend, foreign large-growth, and world-stock funds have posted 70% to 75% annualized returns from March 10, 2009, through March 25, 2010.

In such favorable conditions, it's natural to be disappointed with any core overseas fund that has earned subpar gains. But it would be a mistake to make too much of how the international large-cap fund that you own--or that you are considering--has fared during this period. Shorter-term returns, even in an exceptional 12-month rally, still aren't very meaningful. And longer-term returns, which ideally include results from more than one rally as well as more than one downturn, remain the best way to evaluate a fund's performance, while risk measures, management quality, and other factors continue to play crucial roles in the overall assessment of any offering.

Moreover, a number of the international large-cap funds that have lagged in the current surge are well-established offerings that boast many strengths and good long-term prospects. It would be short-sighted to abandon or ignore such offerings, of course, and we've decided to highlight three of them here.

 AIM International Growth (AIIEX)
This broker-sold fund has gained 16 percentage points less than the foreign large-growth average of 74% from March 9, 2009, through March 25, 2010. This underperformance is primarily due to its managers' willingness to hold cash and emphasis on high-quality growth stocks. (Lower-quality names have led the way during this rally.) But thanks to those same traits, plus the managers' attention to valuations, this fund has lost significantly less than its typical peer in the late-2007 to early-2009 sell-off and other downturns, and it has suffered less overall volatility than the group norm. And though it has not been a consistent rally star, this fund has performed well in certain up markets, and it has better-than-average 10-year and 15-year returns. The fact that this fund's management is deep as well as seasoned adds to its long-term appeal.

 American Funds Capital World Growth & Income (CWGIX)
This front-load global fund's long-term merits are legion. It has a really low 0.83% expense ratio that gives it an edge year in and year out. It's run by a team of managers who are as experienced and talented as any around. The managers' strategy--which involves buying attractively priced blue chips with healthy dividends and sticking with them--is inherently sound. And the managers have executed their approach skillfully in a wide variety of market climates over the years, so this fund boasts superior three-, five-, 10-, and 15-year returns as well as a moderate risk profile. All this means that it makes sense to overlook the fact that this fund has returned 7 points less than the world-stock norm of 72% from March 9, 2009, through March 25, 2010.

 Portfolio 21 (PORTX)
This no-load world-stock fund is lagging the majority of its category peers in the current rally with a 67% gain, partly because its managers' strict stock-selection standards have led to a limited stake in the especially strong financials sector and a significant cash stake. The managers, however, have produced good results with their growth-at-a-reasonable price discipline over time. This socially responsible fund held up relatively well in the late-2007 to early-2009 meltdown--and has suffered rather modest volatility overall--thanks to their execution as well as the conservative aspects of their approach. And it has outpaced its typical rival over all trailing periods of three years or more, as the managers have generally delivered solid results in past rallies. The fact that all four of its managers are very experienced is another plus.