3 Struggling Foreign Large-Growth Funds That Should Bounce Back

Value-oriented stocks and sectors outperformed significantly in 2016, not just in the United States but also in most international markets. Indeed, the typical fund in the foreign large-value Morningstar Category gained 3.3% for the year and the MSCI EAFE Value Index gained 5%, while the foreign large-growth category lost 2.1% and the MSCI EAFE Growth Index lost 3.0%. Of Morningstar’s six diversified foreign stock categories, only foreign small/mid-growth performed worse than foreign large-growth, losing 3.0%. (Foreign large-growth funds have gained a modest edge over their value counterparts in 2017 through March 20 but still substantially lag since the start of 2016.)

A couple of the Morningstar Medalists in the foreign large-growth category handled last year’s challenging conditions skillfully and posted solid gains.

But a trio of the medalists in the foreign large-growth category struggled, including Silver-rated

Artisan International

ARTIX

This fund really struggled in 2016. It lost 9.7%, ranking in the foreign large-growth category’s 97th percentile and finishing close to 11 percentage points behind the 1% gain of its MSCI EAFE benchmark. The marked underperformance was largely attributable to its lack of exposure to the strong energy sector, a hefty stake in the weak consumer defensive sector, and declines in a few notable holdings such as media conglomerate Liberty Global LBTYK. But lead manager Mark Yockey, who’s run the fund since its late 1995 inception, has always allowed his stock selection to lead to sizable divergences from indexes at the sector and industry levels, so this fund’s relative performance has often been lumpy.

Meanwhile, Yockey is a seasoned and skilled money manager, and he has a strong and experienced support team. His strategy is sound as well as flexible; he typically invests in a mix of steady growers, more rapidly growing (and pricier) companies, and turnaround plays. And while last year’s poor showing (as well as a rough 2015) dented the fund’s returns, it surpassed all of its foreign large-growth peers and 85% of foreign large-blend funds (its former category) on both a total-return and risk-adjusted basis from its inception through February 2017. The fund, which is closed to most new investors, is still a good long-term investment for those who can handle its rough spells.

Fidelity International Discovery

FIGRX

This fund lagged 84% of its foreign large-growth peers and trailed its MSCI EAFE benchmark by almost 7 percentage points in 2016 with a 5.8% loss, as manager Bill Kennedy’s stock selection in several markets, including Switzerland and the United Kingdom, backfired. However, the quality-oriented and growth-driven strategy that he used to make those picks is both sensible and distinctive; it includes an emphasis on firms with strong balance sheets where management owns a large stake in the company. Moreover, he has often put his process to good use in the past, and the fund has outpaced the MSCI EAFE Index, the MSCI EAFE Growth Index, the average foreign large-growth fund, and the typical foreign large-blend offerings since he took charge in 2004 on both a total-return and risk-adjusted basis. (This fund used to reside in the foreign large-blend category.) Kennedy has more than 20 years’ tenure at Fidelity and can draw support from an exceptional array of resources. The fund remains a solid choice.

Fidelity Diversified International

FDIVX

This fund failed to deliver in 2016. It lost 3.7%, which was worse than roughly two thirds of its foreign large-growth peers as well as nearly 5 percentage points behind the 1% gain of its MSCI EAFE benchmark. Manager Bill Bower’s stock selection in consumer cyclicals, a dearth of exposure to basic-materials stocks, and a significant stake in U.K.-based firms that are domestically focused (and thus struggled after Brexit) were the biggest detractors to performance.

There have been other periods of disappointing performance here, primarily a so-so stretch in the middle of the previous decade, but they often owe to Bower’s preference for companies with durable competitive advantages and his willingness to pay up for such firms. He’s an experienced and talented investor who has one of the biggest and broadest support teams around. He has executed his growth-at-a-reasonable-price strategy well overall. Since he took over in 2001, this fund has handily outpaced the MSCI EAFE Index and the MSCI EAFE Growth Index, as well as more than 75% of foreign large-growth and foreign large-blend funds on both a total-return and risk-adjusted basis. The fund is still a fine option.