Two Medalists From My Buy List

I don't make a lot of changes to my portfolio. I buy good funds for the long haul and tend to be patient. Early in 2014, I added one new fund in my portfolio and also made one significant additional investment in a second.

As it happens, both are foreign-stock funds. Because the U.S. market had bigger returns in 2013, my portfolio was looking a little U.S.-heavy, so sending some new money to foreign funds helps me get back where I want to be. In addition, foreign equities in general look a bit more attractive than U.S. stocks.

The new fund is Silver-rated  DFA International Small Company (DFISX), which was added to the Morningstar 401(k) plan. DFA is a master of small caps. Its strategy is to behave mostly like an index fund except when it comes to trading. Because small-cap stocks tend to have wide bid-ask spreads, index funds that track such equities can be hurt by making lots of little trades that are bound to put them on the wrong side of those spreads.

DFA's approach is to instead capture as much of those spreads as possible for its funds taking a flexible approach to portfolio building. That means the firm offers to buy when someone is really eager to sell, and sell when someone is really eager to buy. Thus, DFA gets to capture a lot of those spreads. This means that its trading costs are either very low or even a net source of profits, while traditional small-cap index funds face challenges from making small trades in small stocks. DFA's approach to small caps has translated well overseas as this fund's top-quintile 15-year returns suggest.

Not everyone can get into DFA funds, though. DFA is available through more planners and platforms than it used to be, but it's still fairly tough to access. A pretty good alternative is Silver-rated  Vanguard FTSE All-World ex-US Small-Cap Index , which is also available as an exchange-traded fund, (VSS). (The Vanguard and DFA funds track different benchmarks so they're not perfect substitutes.) The Vanguard fund has a lower expense ratio than the DFA fund. However, the Vanguard fund doesn't pull out as many tricks to reduce trading costs as DFA does, so it's something of a wash.

There are a couple key differences, though. The DFA fund invests only in developed markets while the Vanguard fund includes emerging markets--about 12% at last check. Also, the DFA fund dips into micro-caps more and that's where its flexible trading strategy is most important.

In the spring, I also put some more money in Gold-rated  Dodge & Cox International Stock (DODFX), which I've owned for more than 10 years. For starters, I like the culture of the firm. Dodge & Cox managers and analysts often spend their careers at the firm, and the stability of the investment team gives the fund a competitive advantage. It also makes all of the firm's funds easy to own for the long haul, as a single manager departure won't spoil things.

The fund's low costs also stand out in an asset class where many other firms get away with charging extra. This fund started with a low expense ratio and has kept it low ever since. I think I may have mentioned the importance of costs once or twice.

True, the fund took its bumps in 2008, but since its 2001 launch, it has doubled its benchmark's return by sticking with its strategy even when it was out of favor. Finally, I love management's commitment to the fund. Eight of nine listed managers have more than $1 million of their own money invested in the fund, and the ninth has between $500,000 and $1 million.

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