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If the Sun Continues to Shine on Japan, These Foreign Funds Are Ready

Investors looking for diversified foreign large-cap funds that have an overweighting in the country should consider these names.

For investors who believe that good things come to those who wait--especially those enduring the long wait for Japanese stocks to show signs of life--things have been looking pretty rosy lately. The Nikkei 225 index of large-cap Japanese stocks is up a whopping 48% so far this year and up 78% for the 12-month period ended May 21. This Japanese bull run has led to average year-to-date gains of 32% and average 12-month gains of 52% for the Japanese-stock-fund category, making it easily the best performer of any fund category tracked by Morningstar during those time periods.

For longtime observers, Japan's improving situation represents a welcome departure from more than two decades of stagnation in one of the world's largest economies. Much of the credit goes to reforms introduced by Japanese Prime Minister Shinzo Abe, including stimulus measures designed to counter crippling deflation and revitalize the country's export economy. Although there's no telling what the long-term effects of "Abenomics" will be, the near-term impact on Japanese stocks has been undeniable.

While funds focused solely on Japanese stocks clearly have benefited so far, so have a handful of quality foreign-stock funds that hold outsized allocations to the country in their diversified portfolios. To identify such funds we used Morningstar's  Premium Fund Screener tool and searched for foreign large-cap funds with at least 20% of their holdings in Japan, meaning they have allocations to the country that are well above the foreign large-blend, foreign large-value, and foreign large-growth category averages. We restricted our search to funds with Morningstar Analyst Ratings of Gold, Silver, or Bronze to ensure they've been vetted for quality. We included load funds in our list, but Premium Members who prefer only no-load funds can add that as a screen. A few of the funds that qualify are described below, and Premium Members can see the full list  here.

Of course, just because Japan's stock market has been on a roll of late is no guarantee it will continue. So don't dive into these funds based solely on their strong recent returns. Also be aware that funds do shift their weightings periodically, so just because a fund has an overweighting in Japan, as of its most recent portfolio disclosure, doesn't mean it will continue to do so. But at the very least, this list reveals funds and fund managers Morningstar analysts have liked in the past and who were in the right place at the right time on what is currently one of the world's best-performing markets.

 Fidelity Spartan International Index  
Morningstar Analyst Rating: Silver | Exposure to Japan: 21%    
This fund tracks the MSCI EAFE Index, which consists of large- and mid-cap companies in developed markets in Europe, Asia, and Australia. The index includes a 22% weighting of Japanese stocks, well above the foreign large-blend category average of 16%. The only other country, other than Japan, that makes up a comparable portion of the portfolio is the United Kingdom at 22%. Fees, at just 20 basis points, are among the lowest available for a foreign large-blend fund.

 Oakmark International (OAKIX) 
Morningstar Analyst Rating: Gold | Exposure to Japan: 21%
Perhaps it shouldn't come as any surprise that contrarian fund managers David Herro and Rob Taylor have an overweighting in Japan despite the country's lackluster past performance. The pair focus on company fundamentals, capital allocation, and growth potential in seeking out attractively priced firms. Top Japanese holdings include Daiwa Securities (DSEEY),  Canon (CAJ), and  Toyota (TM). The fund also is overweight in Europe's developed markets, which account for more than half of the portfolio, with financials, industrials, and consumer cyclical stocks all at about 10 percentage points greater than the foreign large-blend category average. The fund's top fifth percentile returns in its category during all trailing time periods speaks to its superior performance record.

 MFS International Value (MGIAX) 
Morningstar Analyst Rating: Silver | Exposure to Japan: 28%
This foreign large-value fund has had a hefty stake in Japan for a while. Unlike many of its peers, the fund focuses on quality companies selling at attractive prices. The fund's managers also will dip into mid-cap territory when they see opportunities there. The fund's quality bias has helped it earn a low Morningstar Risk rating while delivering high returns for its category. The portfolio is overweight in consumer defensive (25%) and tech (12%) stocks. Top Japanese holdings include  KDDI (KDDIY), Kao (KCRPY), and Japan Tobacco (JAT). Expenses of 1.21% are low for a foreign large-cap front-load fund.

Portfolio data as of March 31; performance data as of May 20.

Adam Zoll has a position in the following securities mentioned above: OAKIX. Find out about Morningstar’s editorial policies.