Our Picks for Foreign-Stock Investors

Wide-Moat Stocks
Just as they do for U.S. stocks, Morningstar analysts assign moat ratings--a measure of a company's sustainable competitive advantages--to many foreign stocks as well. The idea is that companies with economic moats often produce excess economic profits over time as compared with their competitors without moats. For a list of wide-moat companies based outside the U.S. and currently trading at prices considered fair (3 stars) or even a bargain (4 or 5 stars) according to our analysts' estimates, click  here (Premium Membership required). Below are two such companies.

 Sanofi (SNY): This firm's wide lineup of branded drugs and vaccines and robust pipeline create strong cash flows and a wide economic moat. Growth of existing products and new product launches should help offset weakening pricing in the insulin market.

 Schlumberger (SLB): The largest oil-services company in the world. The firm works with international, state-owned, and independent oil companies to improve reservoir analysis, well drilling, and production. In addition to being the dominant firm in the sector, it helps that the company operates in a growing industry, thanks to increasing oil-services needs in the Arctic, deep-water exploration, unconventional drilling, and managing mature oil fields.

Active Foreign-Stock Funds
For U.S. investors, buying foreign stocks can be particularly challenging given that many foreign companies may be unfamiliar to them. For those who prefer that a fund manager do the research and stock selection for them,  this list of analyst-approved foreign large-cap funds may prove useful (Premium Membership required). It includes the following funds. (Note: Here, and for all lists in this article, only non-institutional share classes and funds open to new investors are included.)

 Dodge & Cox International Stock (DODFX): This fund essentially uses a standard value-investing approach but executes it with unusual dedication and patience. Its managers look for companies they consider undervalued versus their true long-range worth. That often leads them to very unpopular stocks, such as major pharmaceutical firms when concerns about lackluster pipelines are rampant or individual companies suffering from specific issues.

 Manning & Napier World Opportunities : This fund's managers are not hesitant to stand apart from their benchmark or foreign large-blend peers. The portfolio shifts across regions, sectors, and market-cap levels. Analysts drive the deviations through their fundamental research to identify firms that meet one of three profiles--industry-leading firms with sustainable competitive advantages, stocks expected to emerge as industry leaders following a cyclical slump, and deep-value opportunities the managers think are set for a turnaround--and then they present those ideas to the management team.

Foreign-Stock Index Funds
As with U.S. equities, investors seeking an index-based way to buy foreign stocks have many good options. Premium Members can click  here for a list of analyst-recommended foreign large-cap index funds, including the following.

 Fidelity Spartan International Index : One of the lowest-cost international funds available (expense ratio: 0.20%), it tracks the MSCI EAFE Index, which covers large- and mid-cap stocks listed in developed markets in Europe, Asia, and Australia. This broad international portfolio can help diversify currency, interest-rate, and other local-market risks while leaving out more volatile emerging-markets stocks.

 Vanguard Total International Stock Index (VGTSX): A solid choice for broad exposure to international equities. This cap-weighted index fund invests in more than 5,000 companies in developed and emerging markets (excluding the United States) that, together, account for about 50% of the world's market cap.
ETF alternative:  Vanguard Total International Stock ETF (VXUS)

Emerging-Markets Funds
Some foreign-stock funds dabble in emerging-markets stocks, which tend to be more volatile but may offer more upside potential than those found in developed markets, especially if investors buy them when their prices are low. But for investors looking for dedicated emerging-markets exposure,  this list, which includes the two funds below, can help.

 American Funds New World (NEWFX): This fund offers relatively low-risk exposure to emerging markets. Rather than being a pure play on emerging-markets equity, it often keeps about 40% of its assets invested in developed-markets stocks and 10% in emerging-markets debt. Those two elements have made the fund far less volatile than most peers but without sacrificing too much of the upside. (This fund may carry a sales load.)

 T. Rowe Price Emerging Markets Stock (PRMSX): The managers of this fund use a sound, growth-oriented strategy that has a sensible mix of tame and bold traits, which results in a distinctive portfolio. They have a sizable and skilled support squad, which includes 26 emerging-markets stock analysts, the managers of T. Rowe Price's regional emerging-markets funds, and the team that runs the firm's Bronze-rated  T. Rowe Price Emerging Markets Bond (PREMX).

Foreign-Currency-Hedged Funds
One wild card that can greatly affect foreign-stock fund performance is currency risk. An otherwise strong-performing fund whose holdings are denominated in currencies that are losing strength relative to the U.S. dollar won't look so hot from the perspective of U.S. investors. Most of the large foreign-stock funds include ample exposure to foreign currencies--either their managers don't hedge or they hedge only periodically and not for all of their portfolios. Meanwhile, funds that fully hedge their foreign-currency exposure, such as the fund below, are unusual.

 Tweedy, Browne Global Value (TBGVX): This foreign large-value fund's currency-hedging has a big impact on its relative results at times, although the larger driver of success has been management's measured approach to value stocks. The fund's managers will happily pay a fair price for a good business, and they hold such positions for years, using a long time horizon to their advantage.

Foreign Small-Cap Funds
While investing in foreign stocks in itself provides a form of diversification for your portfolio, many foreign-stock funds invest primarily in large-cap stocks. For added diversification, consider a quality foreign small-/mid-cap fund, such as those listed  here, including the following.

 Columbia Acorn International (LAIAX): Managers Louis Mendes and Zach Egan pursue fast-growing small- and mid-cap stocks, and they do extensive research, pay attention to valuations, and move at a measured pace while doing so. They will readily build distinctive stakes in individual countries and load up on stocks in the developing world as long as those issues meet their growth standards and various other criteria. (A no-load version of this fund is closed to most new investors, but a load version remains open.)

 T. Rowe Price International Discovery (PRIDX): Lead manager Justin Thomson and his comanagers focus on companies with market caps between $100 million and $3 billion that have compelling business models and the ability to generate returns above the cost of capital. In particular, they focus on profitable growers that have expanding market shares, strong or improving pricing power and margins, high-quality income and balance sheets, and high returns on equity and invested capital.