Why Global Funds Are All Over the Map

When investors try to determine why their fund is or is not performing well, they typically look for the most obvious reasons. If tech or energy has been hot, for example, they figure the funds that are thriving must invest more heavily in that sector than most peers do.

That idea does hold water to a certain extent. Broad themes do influence fund performance, and sometimes they can effectively explain a fund's ranking. Usually, though, there's more to the story. The specific traits of each fund's portfolio--or expense ratio, or other factors--can have a tremendous impact, sometimes overcoming the effects of larger patterns. A look at this year's world-stock category, which features an extremely wide range of performance, offers a potent illustration of this phenomenon.

Rising to the Top
For the year to date through Sept. 23, 2010, the range of performance for world-stock (also called global) funds, which split their portfolios between the United States and abroad, has been remarkably broad. The top performer, John Hancock Global Opportunities , has gained 20% so far this year, while the cellar-dweller (excluding funds with less than $10 million in assets) is DWS Climate Change , which has plunged 14%. And while those are the extremes, they aren't distorting the picture. Eight funds have positive double-digit returns, and even more than that land in negative territory.

The John Hancock fund, an all-cap portfolio, has benefited from its willingness to look beyond the biggest and most recognizable companies around the world. Small and mid-caps have outperformed by a long shot in 2010, and this fund owns far more of these than most other global funds. (Several of the category's other top performers are pure small-cap offerings, in fact.) A second differentiating factor: The fund's hefty emerging-markets stake. With roughly one third of its portfolio in emerging markets, John Hancock Global Opportunities has benefited more than most other global funds from the surge in many such markets this year.

However, don't overlook stock-specific effects. Note that  Sirius XM Radio (SIRI), which has consistently been at or near the top of the portfolio this year with weightings between 5% and 9% of assets, has soared more than 90% in 2010.

A more prominent global fund that has also thrived this year has taken a different route.  Wintergreen , run by David Winters, owes its strong 2010 showing not to small stocks or mid-caps--the portfolio is filled mainly with big companies. Nor does it have a large stake in emerging markets. Rather, Winters has picked a number of big winners this year and allotted serious money to them. At midyear--the most recent portfolio available-- Berkshire Hathaway (BRK.B), Swatch Group, Schindler Holding (which makes elevators and escalators), and Jardine Matheson Holdings (an Asian conglomerate) each took up between 4.9% and 9.2% of assets. Each has climbed sharply this year.

Rough Time for Some
On the down side, several environment-themed funds join the DWS offering at the bottom of the world-stock chart. These funds, which include  New Alternatives (NALFX), were hurt most notably by the slide in solar-energy and wind-energy stocks. Some of the most prominent such firms are located in Spain, where extreme economic weakness added to their woes.

Beyond these specialized funds, the category's cellar features many offerings without extensive emerging-markets or small/mid-cap exposure. One that fits that profile is  Putnam Global Equity (PEQUX), which limits its stakes in emerging markets and sticks primarily to big stocks. While both traits did hurt this year, though, this fund is no stranger to mediocre performance. A poor long-term record that includes only a few bright stretches indicates something more is at work here.

 Templeton Global Opportunities's  low ranking this year is unusual. Typically, this fund has been a solid, if not exceptional, performer. Also unlike the Putnam fund, this one is lagging despite having an emerging-markets stake higher than the norm. The culprits lie elsewhere. Like other Templeton international funds, it has been undermined by a devotion to seemingly cheap pharmaceutical giants, whose shares have lagged. In addition, a higher-than-average exposure to sagging European currencies has also hurt. To make matters worse, the lead manager responsible for the fund's fine long-term record left the firm a few weeks ago.

Although this review has looked at a fairly short period of time, the differences here show how critical it is to check out a fund carefully before buying. Whether or not a global fund owns smaller stocks or pays substantial attention to emerging markets are two factors to consider, but there's much more to think about beyond those traits. Even among funds that employ somewhat similar approaches, distinctions arise. That's how two shops known for their value strategies--Wintergreen and Templeton--can find themselves at opposite ends of the year-to-date chart.

A final point that comes out is the crucial importance of stock selection. Themes, geography, market-cap size, and other overarching issues can have a huge impact on a fund's performance. But the effects of decisions on exactly which stocks to own, at exactly which time, and in what precise proportions, should never be overlooked.