Foreign Funds That Have Weathered the Storms

No fund performs well in all market environments, but during the past few weeks we've used the upside and downside capture ratio metrics to identify those that have managed to outpace their benchmarks in good times while also limiting losses in bad times. In the domestic large-cap, domestic small-cap, and intermediate-bond fund categories there are dozens of funds that have managed this two-way feat during the past decade. We've shone the spotlight in particular on those with the biggest gap between upside and downside performance as this suggests special skill at navigating the market's ups and downs, at least during the time period in question.

But this week, as we apply this same test to the foreign large-cap categories, we find that such two-way outperformance is actually quite rare. In fact, even though 85 foreign large-cap funds with 10-year track records managed to outperform the benchmark on the downside (in other words, the funds lost less on average than the index did in months when the index went down), only 49 beat it on the upside, suggesting that outperformance in months when the index saw gains was more difficult.

One possible explanation for the small number of funds outperforming the benchmark to both the upside and downside during the past decade involves the benchmark itself. To calculate upside and downside capture ratio among foreign large-cap funds, Morningstar uses as its benchmark the MSCI All-Country World ex-USA Index (ACWI ex-US), which tracks large- and mid-cap stocks from 45 developed and emerging markets outside the United States. The index currently has a 14% weighting in emerging markets, or about double that of the average foreign large-blend fund. The index's heavier weighting in emerging-markets stocks, which tend to be more volatile than their developed-markets counterparts, presents a challenge for foreign large-cap funds to overcome, especially on when emerging markets are outperforming developed markets. (As a point of comparison, the MSCI Emerging Markets Index returned 9.9% annually during the past decade as of April 7, while the MSCI EAFE, which tracks foreign developed markets, returned 6.3% during that same span, though it has fared much better relative to the emerging-markets index more recently.)

Only eight foreign large-cap funds managed to outperform the index on both the upside and downside during the past 10 years (institutional funds were not included in our screen, conducted using the Morningstar Direct platform, because many readers don't have access to them). Those funds appear below, ranked according to the largest gap between their upside and downside capture ratios.

Foreign Funds With 10-Year Upside/Downside Capture Ratios That Beat the Benchmark
Fund	Foreign Category	Upside Capture Ratio	Downside Capture Ratio	Difference	Star Rating	Analyst Rating
Ivy Intl Core Eq (IVIAX)	Lg Blend	101.82	92.88	8.93		N/A
Laudus Intl MktMst	Lg Growth	103.41	94.94	8.47		Bronze
Mng/Napr Wld Opp	Lg Blend	100.15	94.89	5.26		Gold
Thomas White Intl	Lg Value	102.41	98.05	4.35		Bronze
Artisan Intl (ARTIX)	Lg Blend	102.54	99.12	3.42		Silver
Vanguard Intl Gr (VWIGX)	Lg Growth	102.49	99.74	2.75		Silver
William Blair Intl Gr (WBIGX)	Lg Growth	100.10	99.59	0.52		Neutral
Causeway Intl Val (CIVVX)	Lg Blend	100.12	99.67	0.45		Gold
Data as of March 31

It's worth noting that nearly all these funds currently have emerging-markets weightings below that of the index (though this may not always have been the case during the past decade), one exception being  Vanguard International Growth (VWIGX), which had 15.2% of its portfolio in emerging-markets stocks as of Dec. 31. At the other end of the spectrum is  Causeway International Value (CIVVX), which held a mere 3% of its portfolio in emerging markets on that date. This low allocation to emerging markets has served the fund well for the past year, during which developed markets delivered solid returns while emerging markets languished. As a result Causeway International Value's trailing one-year upside capture ratio during the past year stands at an impressive 112.2 while its downside capture ratio is a remarkable 57.4 (as of March 31). By contrast Vanguard International Growth delivered a stronger upside capture ratio of 121 during that time but also a much higher downside capture ratio of 98.3 (lower is better). In terms of total return, the Causeway fund returned 23.2% during the past year (as of April 7) while the Vanguard fund delivered 19.4%. 

As with our previous analyses of upside and downside capture ratio data, past performance is no guarantee of future results. Funds that have excelled at riding the markets ups and downs in the past will still experience bumps in the road and may underperform during the next 10 years. Management teams turn over, economies ebb and flow, and the market's future performance is as unpredictable as ever. But for a selection of foreign large-cap funds that have proven adept at riding the waves, you could do a lot worse than the above list.