3 Supporting Players for Your Foreign-Stock Allocation

Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. Foreign-stock funds can help investors round out their exposure to the global stock market. Today, we're taking a look at three highly rated international funds that are a little bit more risky than their more staid core fund counterparts.

Tony Thomas: Gold-rated Dodge & Cox International Stock is a great way to add non-U.S. stocks into one's portfolio for a couple of reasons. First, Dodge & Cox has a bevy of resources at its disposal. It has a very talented analyst team. Those analysts have global reach in their coverage responsibilities, and then there's an excellent investment committee that runs the fund. It's got eight members. It's got a nice mix of veteran managers who have seen a lot of different markets and some rising stars at the firm. So, I'm confident in its personnel going forward.

Secondly, it's got a very appealing approach for the long term. It's contrarian and it's value-leaning by nature, and in short periods that can have some challenges, and that certainly was the case earlier this year when it's European banks and it's energy stocks really struggled. But over time, sticking to its guns has really rewarded investors. That was even apparent in the second quarter as some of those European banks that got beat up in the first quarter really rallied. And then certainly over longer period--the fund has a 19-year history--and even after some weaker years, it tends to rebound very strongly shortly thereafter.

Finally, this is one of the cheapest actively managed options in its space. We know that fees are one of the best indicators of a fund's long-term success, and the fees are certainly an advantage here. For its part, Dodge & Cox International Stock is a no-load fund with an attractive expense ratio, and that's helped the fund build and maintain its edge over time.

Dan Sotiroff: Gold-rated Schwab Fundamental International Large Company ETF has a lot to offer. This inexpensive strategy uses a fundamental weighting approach to emphasize stocks trading at lower valuations, which can be an advantage when market valuations reach extremes. This fund tracks the Russell RAFI Developed ex-US Large Company Index. It targets large- and mid-cap stocks from overseas developed markets and weights its holdings based on sales, retained operating cash flow, and dividends plus buybacks. When the fund rebalances, it will increase its exposure to stocks that have become cheaper relative to these metrics and underweight those as they become more expensive, which instills a value tilt to its portfolio.

This approach has some advantages. Steering away from the most expensive stocks can help performance if and when valuations mean-revert, but there is a trade-off. Ignoring prices means the fund can overweight stocks with declining fundamentals, which can add to its risk. The fund's 0.25% expense ratio places it among the cheapest funds in Morningstar's foreign large-value category and should provide a durable edge over the long run.

Dan Culloton: Oakmark International is an excellent supporting player for your foreign-stock allocation primarily because it's so different. Now, you wouldn't expect that by looking at it because it's a very volatile, very high-conviction fund, and it can be very, very hard for investors to hold, but that's exactly why it's a good diversifier. Because it's not going to behave the way a core or more conservative foreign-stock holding would and certainly not like the indexes. And that's because David Herro, the longtime manager of this portfolio, is a very high-conviction, very independent-thinking, very experienced manager who's willing to take positions in individual stocks and sectors and regions that look very, very different from the benchmark and from its peers.

And what guides him is not any sort of macro decision but his fundamental research into individual businesses and understanding individual businesses and what their value is and what the difference between his estimate of their intrinsic value and the value that the market is placing upon that company. Now, there are going to be periods where it looks really, really bad, such as in the first quarter of 2020 during the COVID market crash. It lost 46% from January to March, but it came back very, very strong in the second quarter. In fact, it was better than 98% of its peers and way better than its benchmark in the second quarter. So, it's going to be a volatile ride, but it is going to provide diversification to your portfolio, and it is going to look different than anything in your portfolio.