A Surprisingly Healthy First Half for International-Stock Funds

Given the steady stream of alarming headlines about the Greek crisis and the wild swings in Chinese stock markets, it may sound surprising that the first half of 2015 was not as tumultuous overall as the latter part of 2014 for stock markets outside the United States.

Late last year, energy prices were tumbling and the Russian ruble crashing along with them, while India continued to soar, capping a very strong year. Major currencies fell against the U.S. dollar. International-stock funds felt the pain; not one of the Morningstar Style Box category averages for international-stock funds topped even the worst-performing U.S. stock category. But a few funds, typically with hefty doses of India and minimal stakes in energy, managed to stand out.

Although this year's first six months have been less rambunctious, the period still had its share of surprises. Most significant was the rebound of European markets despite numerous ongoing concerns. While the Greek saga deepened and the conflict in eastern Ukraine continued to boil, for the most part investors overlooked the negatives and focused on mild signs of European economic recovery and reassurances from the European Central Bank.

With European stocks making up the bulk of nearly every broad international-stock fund, strong markets in the region had a big effect on their performance--even though European currencies again fell (their second-quarter rebounds didn't offset their earlier declines). In addition, the market in Japan--also a key player in most of these portfolios-- remained on an upward swing. Meanwhile, growth in the U.S. was a bit more tepid than expected, making Europe and Japan look more appealing than they otherwise would have.

Thus, even though emerging markets--except for China--generally posted unimpressive returns, in the first half of this year the foreign-stock style-box categories (large-blend and so on) beat nearly all of the U.S. equity categories. Among the U.S. equity categories, only small-growth and mid-growth managed to outperform any of the foreign style-box categories.

Leading the way among the international-stock style-box categories: foreign small/mid-growth, with a gain of 9.1%, followed by the two other foreign small/mid categories. Even the worst of the style-box categories, foreign large-value, landed well into positive territory, with a 5.5% average return.

Meanwhile, the top and bottom performers among all international-stock categories were those devoted to narrow niches. The Japan stock Morningstar Category and China region Morningstar Category landed on top, with average returns of 15.3% and 13.6%, respectively, while the Latin America stock category, burdened by struggling Brazil, brought up the rear with a 7.6% loss.

At the Fund Level A top performer in the foreign small/mid-value category was the $119 million ClearBridge International Small Cap LCOAX, which rose 14%. Helping it out was a big overweighting in technology stocks and a lack of energy firms. (The latter sector has continued to struggle, for the most part, in 2015.) One of the top-performing foreign small/mid-growth funds, Wasatch International Growth WAIGX, also has a much bigger-than-average stake in the technology sector, helping it rise 13.4%.

Among funds focusing on bigger stocks, one rebound that must have the fund's shareholders relieved came from

With most non-U.S. stock markets posting surprising gains, cautious investing was not rewarded. That was reflected in the return of

At least the IVA fund still posted a gain. In worse shape were the frontier-markets funds, which have expanded in number in recent years. The bottom of the emerging-markets category's first-half chart is littered with frontier-markets funds, most of them in negative territory. For example, Templeton Frontier Markets TFMAX lost 3.2% in the first half, following a decline of more than 15% in 2014.

Finally, two of the biggest and most prominent international-stock funds,