A Rewarding Year for International-Stock Funds

By and large, 2017 was highly rewarding for shareholders of international-stock funds. Stock markets around the world enjoyed gains almost across the board.

Expectations of stronger growth in the United States fueled part of that surge; and in most of Europe, cautious optimism and modest but encouraging rates of growth replaced years of concern about weak economies, heavy debt burdens, and political turmoil. (An exception was the United Kingdom, where the ongoing negotiations over the country's prospective exit from the European Union brought uncertainty and concern.) Japan's economy also perked up.

Meanwhile, emerging markets were especially strong, bolstered most spectacularly by stunning gains in Chinese Internet and technology stocks. Some of these companies rose 60% or more in 2017, with one of the heavyweights, Internet conglomerate

The extent of the gains for other emerging markets was equally astounding, as illustrated by the 46.8% return enjoyed by the India stock Morningstar Category. But not every emerging market was that strong--the gains in Russia and Mexico were more pedestrian, for instance. But overall, the diversified emerging-markets category posted a very healthy 34.2% average return.

The vast majority of currencies around the world also strengthened against the U.S. dollar. That provided a boost for nearly all U.S.-based stock funds investing in foreign markets. When these funds translate the returns of their stock holdings into dollars for their U.S. investors, the returns include not just the increase in price of their stocks but the increase in currency value as well. The only funds that didn't receive this extra bonus were the few that fully hedged their foreign-currency exposure into the U.S. dollar.

The impact of currency gains was substantial. The MSCI Europe Index, for example, rose 13.1% in local-currency terms, but gained a mighty 25.5% when translated into U.S. dollars.

With markets so robust overall, the international-stock funds that failed to keep pace typically held more than a few percentage points of assets in cash, or they shied away from the high-flying, market-leading Internet and technology stocks.

Toward the other end of the spectrum stood

Owning the Chinese stars wasn't necessary to stand out, though.