Adding Foreign Funds to a U.S. Lineup Is No Easy Task

A little over five years ago, several successful fund shops that in previous years had limited their lineups to domestic-stock funds (albeit with significant amounts of foreign holdings in some cases) came out with their first publicly available international-equity funds. In theory, they should have been able to apply their proven methods abroad and deliver good results at these funds. Then, on the strength of that record and the firm's fine reputation, the assets would follow.

It doesn't necessarily work out so smoothly in practice, though. The stories of three international-stock funds that recently marked their fifth anniversary reveal the difficulties that can arise. 

Buffalo China
The Buffalo lineup of funds, advised by Kornitzer Capital Management, has established a solid reputation for small- and mid-cap investing. When the firm first decided to venture overseas, it didn't take the obvious path: a broad international fund that focused primarily on Europe and Japan, with some emerging markets as well. (That came the next year, with Buffalo International (BUFIX).) Instead, the shop concentrated on China and launched Buffalo China in December 2006. That was an ambitious first step, but with China's rapid growth rate at the time, and the country's exceptional growth potential, it's not hard to understand the appeal of such a move.

The results, though, have been underwhelming thus far. The fund's five-year return is the second-worst in the China-region category. It has a smaller average market capitalization than the category norm, but it primarily looks at mid-cap and large-cap stocks. The bear market struck less than a year after its inception, and it paid a severe price. From late 2007 to early 2009, it tumbled 64%, even worse than the 58% average loss for the China-region category. That might have been understandable, to a degree, if the fund had dominated the field when stocks rebounded, but it failed to keep up with most of its peers in the rally that followed, and it is lagging again this year.

Not surprisingly, Buffalo China has also failed to do what fund companies hope all newly launched offerings eventually will do: attract a reasonable amount of assets. Even with China firmly in the minds of global investors, it has never garnered much attention, and more than five years after its creation this fund has a scant $22 million in assets. (By contrast, the U.S.-focused  Buffalo Small Cap (BUFSX), launched in 1998, has $2.8 billion in its coffers.) Buffalo International, whose fifth anniversary is still five months away, has had better relative performance but itself has only attracted about $70 million in assets.

Turner International Growth
It would be wrong to assume, though, that Buffalo China's weak performance alone accounts for its tiny size. Turner International Growth's Institutional shares (the oldest share class) came out at the end of January 2007, so they also recently passed the five-year mark. Like Buffalo, Turner had primarily a U.S.-focused fund lineup before it opened this offering, but unlike Buffalo China, Turner International Growth has amassed a strong record in its first half-decade. Its five-year return through April 20, 2012, lands in the top decile of the foreign large-growth category. 

It couldn't be assumed that the Turner momentum-growth approach would succeed abroad, and there are no guarantees it will continue to outperform. But its record so far is noteworthy, even though it was hit very hard in the 2007-09 bear market.

A tougher challenge has been getting anyone to pay attention. Turner has long been known for the quality of its U.S.-focused mid-growth and small-cap growth funds (which have been around since the mid-1990s), but investors evidently prefer to go elsewhere for their foreign-stock exposure. Turner International Growth has a mere $17 million in assets.

 Royce Global Value
This five-year-old fund, from another shop known more for its domestic offerings, has had some success both in performance and in gathering assets. However, there's more to both stories. (Note: Royce had already come out with a global fund in 2005, but that one required a very high minimum investment.)  

On the surface Royce Global Value looks reasonably healthy. It has a top-decile five-year ranking in the world-stock category and assets of $334 million. But like nearly all Royce funds, it focuses on small- and mid-cap names, so it should be compared mainly against the limited cohort of world-stock funds that do the same. As it turns out, it ranks highly among that more-compact group as well. That said, the road has been anything but smooth: It has been one of the most volatile offerings in that small/mid-cap subgroup, and it lost 18.7% in 2011, more than most of the subgroup.

The asset story is complex, too. In mid-2011, this fund had a larger asset base, close to $600 million, but a large institutional shareholder withdrew its money. So, while this once U.S.-focused shop has attracted more interest to its first widely accessible international fund than Buffalo and Turner have done with theirs, it's not yet clear that Royce has truly persuaded investors to commit to its international effort for the long term. In fact, none of the six other international mutual funds currently included in its lineup has as much as $50 million in assets.

Final Thoughts
A fund shop that has historically put its investment focus entirely or primarily on U.S.-equity offerings faces two main challenges when it launches an international-stock fund. It must show that its strategy works well abroad by delivering strong results with that fund, and it must convince a significant number of investors to buy--and stick with--the portfolio. Buffalo China has not succeeded on either front. What's noteworthy about the other examples is that the first challenge, which seems the more difficult to an outsider, has been overcome to a certain degree, while the latter--attracting a good amount of long-term shareholders--has so far proved elusive.

This is not a comprehensive survey, of course, and it is not intended to imply that expanding abroad can't be done. There are shops that have successfully met these challenges over the years. (Hiring a firm with proven foreign-stock expertise to subadvise an international fund is an option that has worked well in several cases.) But the fact is that for these three funds from reputable shops, the success of their foreign venture remains uncertain after more than five years. That in itself should serve as a cautionary note to U.S.-focused fund companies that might think it would be easy to add a foreign fund or two to their lineup.