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The First Half in International-Stock Funds

Brazil's rebound in 2016 boosts emerging-markets funds--especially those that target Latin America.

More than usual, this review should come with a warning that the numbers you see below may have changed substantially by the time you read this column. It was written just after Friday, June 24, when the reaction to the United Kingdom's vote to leave the European Union sent many stock markets around the world plunging and led to wild rides for currencies, bonds, and commodities. The turmoil continued on Monday morning, and no one knows where the ride is going from here. 

Even so, while the dramatic events late last week changed the year-to-date performance figures for markets, Morningstar Categories, and individual funds, in general they did not reverse the overall trends that had been in place in the first half of the year. (Or, more precisely, since roughly mid-February, when markets began to rebound from the deep declines that had marked the first six weeks of the year.) For example, the Europe-stock category average tumbled from a 1.4% year-to-date gain after June 23 to a 6.4% year-to-date loss one day later--but it already had been one of the lowest-ranking categories before that decline.

One trend that's marked this year's first half would have surprised anyone who thought a main theme of the past couple of years--the lagging performance of emerging markets--would persist. That pessimism wouldn't have been an unreasonable expectation, given the ongoing political, legal, and economic turmoil in Brazil and the continuing signs of a significant slowdown in China's economy. These are two of the largest and most important emerging markets.

However, even though reasons for optimism in these countries are hard to find (and indeed, the China-region category is the worst performer among international-stock categories this year), investors were apparently in the mood to grasp at whatever positives they could locate in emerging markets. Such signs included the deposing, at least temporarily, of Brazil's embattled president and rising energy prices that provided otherwise-troubled Russia a boost.

As a result of the turnaround in sentiment toward Brazil's stock market (and just as important, its currency), the top-performing international-stock category for 2016 through June 24, by far, was Latin America stock. These funds, whose portfolios are dominated by Brazil, rose 18.2% on average. Although not approaching the magnitude of that category's gain, the more broadly focused diversified emerging-markets category did do well enough to land in second place, with a 2.1% gain. (These categories were already in the lead before June 24's tumult, when they had milder losses than those categories that focus mainly or exclusively on developed markets, such as foreign large-blend or Europe-stock.)

One fund in particular that benefited from the rebound in Brazil was  Invesco Developing Markets (GTDDX). Powered by a Brazil weighting that's more than double the diversified emerging-markets average, this fund has posted a 13.6% return for the year to date, tops in the category. (Other factors such as solid stock selection in that country, and overweightings in Russia and smaller Asian markets that outperformed also helped.) This follows a rough 2015 for that fund, a year in which it landed in the category's bottom quartile--with some of the same weightings bearing much of the blame.  Lazard Emerging Markets Equity (LZEMX), which also has overweightings in Brazil and Russia, has staged a similar rebound into the upper reaches of the category this year after a troubled 2015.

Among the broad Morningstar Style Box categories, such as foreign large-blend or foreign small/mid-value, a variety of factors affected returns. The relatively few funds that hold significant stakes in gold, such as  First Eagle Overseas (SGOVX), have been helped by that commodity's sharp gains this year. (That fund is in the foreign large-blend category's top decile.) Stakes in miners, as well as a high weighting in the energy sector, helped push  Templeton Foreign (TEMFX) ahead. Those funds that have made commitments to the "right" emerging markets have benefited this year, too.

Often, the traits having a major impact on fund performance include their style preferences, meaning whether they follow a growth bent or a value strategy or something in between. And in the first half of 2016, value categories performed better than the growth categories in the international realm. But it's worth noting that the differences were not as pronounced as they were on the U.S.-stock side, where value categories trounced the growth categories by wide margins. For example, the foreign-large value category outperformed the foreign large-growth category by less than a percentage point through June 24, while the comparable categories devoted to U.S. stocks were separated by more than 5 percentage points.

There were also meaningful distinctions in performance based on the size of the companies that funds focus on. For international-stock funds, those that target small and midsize companies have fared better this year, on average, than those that inhabit the large-cap categories.

Of course, stock selection rather than country or sector weightings or value versus growth styles also played a large role in individual fund performance. So it's worth keeping in mind that generalizations are of only limited value. In trying to determine the reasons behind any particular fund's performance this year, or over any period for that matter, digging into the portfolio is most likely to reveal the most helpful results.

Gregg Wolper has a position in the following securities mentioned above: SGOVX. Find out about Morningstar’s editorial policies.