3 Foreign-Stock Funds for Rebalancing in 2020

Susan Dziubinski: Hi, I'm Susan Dziubinski for Morningstar. As a group, international stocks rebounded in 2019, yet U.S. stocks did even better, and as a result, investors may find that their portfolios are more exposed to U.S. stocks than they might think. Here are three of our favorite foreign-stock funds for bringing balance to your portfolio in 2020.

Dan Culloton: Oakmark International Small Cap is an excellent option for rebalancing because it uses a proven approach to invest in international small-cap stocks. It has a very experienced manager, David Herro, who runs Gold-rated Oakmark International, and he's ably assisted by Justin Hance and Mike Manelli, two veteran Harris Associates analysts who are also on Harris Associates' stock selection team. They use the same approach as they use at Oakmark International. They look for stocks that are trading at discounts to their estimates of their intrinsic value, and they hold on for a long period of time. They like to buy when things are under a cloud or are facing some sort of company-specific controversy, and they like to hold until their theses play out. The result is you have a portfolio that doesn't look like the index or its peers. It has a very lumpy risk/return profile. For example, in 2018, it lost about 24%, then it bounced back in 2019 with a 32% return. So, you have to be prepared to ride out some rough periods in this stock fund.

Dan Sotiroff: Vanguard FTSE All-World ex-US ETF is a great long-term index fund. This is one of the most diversified portfolios in Morningstar's foreign large-blend category. It captures stocks from more than 40 developed and emerging markets listed outside of the U.S. The emerging-markets section of this portfolio only comprises 20% of the funds assets, so its inherently risky nature isn't likely to affect the fund's performance over the long term. This is also one of the most diversified portfolios you can get, so the stock-specific risk also isn't likely to affect the fund's performance. The other thing we really like about the fund is its market-cap-weighted approach. This sort of approach emphasizes larger, more stable companies while de-emphasizing companies that are smaller and more volatile. It also helps reduce turnover, which can contribute to lower trading costs at the end of the day. Finally, we also like the fund's ultralow fee. It's one of the cheapest in Morningstar's foreign large-blend category, which should help it perform, or outperform, a lot of its peers over the long run.

Gregg Wolper: If you're looking for an international-stock fund to help rebalance your portfolio after U.S. stock funds have outperformed so much in the past few years, one good choice would be American Funds International Growth and Income. What sets this fund apart is its income mandate. Almost all of the stocks it owns are dividend payers, and that helps assure that they're not troubled companies. They have the wherewithal to pay out some dividends consistently, but they're not the highest dividends, which is good. You wouldn't want troubled companies that can't afford to keep paying those dividends. I wouldn't call it a defensive fund, though, because it has a substantial emerging-markets stake, so in downturns it doesn't necessarily provide a cushion. It also has a growth tilt, but overall it has a very good record over time. And the flip side is that it can outperform in rallies, as it did in 2019. It also has very low cost, like most American Funds. So, all in all, American Funds International Growth and Income would be a good choice if you're looking for an international-stock fund at this time.