5 Foreign-Stock Funds for Risk-Averse Investors

Note: This article is part of Morningstar's May 2016 Risk Management Boot Camp special report.

For many investors, the idea of achieving international exposure via an index fund makes perfect sense. Funds such as

, there are other risk considerations that come with investing in foreign stocks--currency and geopolitical risks, to name a few.

To help identify some international funds with a solid record of downside protection, I used Morningstar Direct software. First, I screened for funds in foreign-stock categories that earned one of our Medalist ratings--Gold, Silver, or Bronze. (My screen included all international-stock categories, but I focused on funds in the large-cap foreign-stock categories, as they tend to invest 55%-70% of their holdings into stocks in the major markets of Europe, excluding Russia and Eastern Europe, and usually have only a small slice, if any, allocated to emerging markets. Premium members can click

to see all our foreign large-cap medalist funds.)

I included some additional criteria to narrow that list: All the funds listed below have a "low" or "below average" Morningstar Risk score over the trailing 10-year period. This proprietary Morningstar datapoint assesses the variations in a fund's monthly returns, with an emphasis on downside variations. In each Morningstar Category, the 10% of funds with the lowest measured risk earn a "low" risk score, and the next 22.5% score "below average."

I also looked for funds with 10-year downside capture ratios that were lower than 100, which indicates that the fund has lost less than the MSCI EAFE ACWI ex US Index in periods when that bogy has been in the red. Finally, I looked for funds that ranked near their respective category's top decile during 2008, when the MSCI EAFE Index lost nearly 46%.

Here are some funds that made the cut.

Tweedy, Browne Global Value

TBGVX

Morningstar Category: Foreign Large Value Morningstar Analyst Rating: Silver 10-Year Downside Capture Ratio: 55.83

2008 Return/Rank in Category: -38.31/9

This fund's managers tend to buy high-quality holdings (such as

Artisan International Value

ARTKX

Morningstar Category: Foreign Large Blend Morningstar Analyst Rating: Gold 10-Year Downside Capture Ratio: 69.66

2008 Return/Rank in Category: -30.11%/5

This fund tends to be less volatile owing to its higher-quality tilt, says Morningstar senior analyst Greg Carlson. In addition, it tends to hold up better than peers in sinking markets because the managers typically seek companies that "while undervalued relative to the managers' estimate of value, still have viable business models, and often have sturdy balance sheets as well," Carlson said. Top holdings include U.K.-based

Morgan Stanley Inst International Eq I

MSIQX

Morningstar Analyst Rating: Bronze Category: Foreign Large Blend 10-Year Downside Capture Ratio: 83.57 2008 Return/Rank in Category: -33.12/8

The team here favors companies that trade at significant discounts to their estimate of fair value, but they also typically prefer those with sturdy balance sheets and competitive advantages over industry peers (examples include narrow-moat

MFS International Value

MGIAX

Morningstar Category: Foreign Large Blend Morningstar Analyst Rating: Silver 10-Year Downside Capture Ratio: 67.11 2008 Return/Rank in Category: -31.91/4

This closed fund's managers focus on high-quality firms that have sustainable competitive edges and other strengths, such as enduring revenue and earnings streams and solid balance sheets, says Morningstar senior analyst Bill Rocco. That strategy has led the managers to favor relatively steady stocks in conservative areas like the consumer defensive sector (such as wide-moat firms

American Funds New World

NEWFX

Morningstar Category: Diversified Emerging Markets Morningstar Analyst Rating: Gold 10-Year Downside Capture Ratio: 86.06 2008 Return/Rank in Category: -46.32/5

It may seem strange to include an emerging-markets fund on a list of funds for the risk-averse, but this fund has long-term appeal as a supporting player in a more risk-tolerant investor's portfolio. Unlike most of its diversified emerging-markets Morningstar Category peers, American Funds New World invests heavily in developed-markets fare (which must derive at least 20% of their revenues from emerging markets). Management's long-held philosophy is that developed-markets companies may sometimes be better positioned to capitalize on emerging-markets growth, says Morningstar analyst Alec Lucas. For example, Lucas points out that although healthcare spending is growing rapidly, there tends to be a dearth of emerging-markets-domiciled healthcare firms. As of the end of March 2016, the fund devoted nearly 57% to large caps in developed markets, such as top holding wide-moat Novo Nordisk. By contrast, only 43% was devoted to emerging-markets stocks, compared with around 70% for category peers. Still, this fund has managed to outperform the typical fund in the diversified emerging-markets category over the 10-year period by more than 2 percentage points, with a fifth less volatility, as measured by standard deviations of returns.