International-Stock Funds Conquer Concerns in 2016

This year was a mirror image of 2015 for non-U.S. stock funds in terms of performance, according to preliminary returns. The average international-equity fund lost 3.4% in 2015 but eked out a 4.0% gain in 2016 through Dec. 29, despite a host of concerns. Those worries included terrorism, political turmoil in both the Western and Eastern hemispheres, and currency volatility.

Wall of Worry Broadly, a rebound in Latin American markets, the United Kingdom's vote to leave the European Union in June, the surprise election of Donald Trump as the U.S. president, scattered acts of terrorism across the globe, and the strengthening dollar were all among the bricks in the wall of worry that most international-equity Morningstar Categories managed to climb in 2016.

The year began with a severe global equity market sell-off, then started a sustained rebound in mid-February. By the end of December, more than half of Morningstar's non-U.S. equity categories were on pace to post gains.

As the year approached its denouement, value was beating growth, small was doing better than large, and emerging markets better than developed. On a more granular level, funds owning a lot of European and Chinese stocks got bruised, while those with exposure to South America and/or Russia got a boost.

Currency effects--as always--played a role in international-fund returns. Most U.S.-based funds are fully or almost fully unhedged, which means that declines in foreign currencies versus the U.S. dollar damp their returns, because those returns must be translated into dollars.

Resurgent Emerging Markets That's the broad sweep. A closer look shows wider divergence among funds and categories.

Latin America stock, diversified emerging markets, and world stock were among the best performing peer groups. Funds such as the unrated Fidelity Latin America FLATX, which posted a 20.5% gain through Dec. 29, were largely driven by Brazilian equities, whose markets rallied despite a continuing business and political scandal that led to the impeachment of President Dilma Rousseff in August. Energy, gold mining, and commodities-related equities also rallied and fueled returns for some of the better-performing international funds.

Many of the same trends drove performance in broader categories. Diversified emerging-markets funds with large weightings in Latin America did well, and global-stock and diversified international-stock funds that leaned toward emerging markets also ranked highly.

Defense was not good offense in 2016.

Global funds with above-average emerging-markets exposure did well. Fearless picks like Brazilian oil giant

More-diversified international funds were a mixed bag. Foreign small/mid-value and foreign large-value funds performed well. Foreign small/mid-blend and foreign large blend were flat on average. The foreign large-growth and small/mid-growth categories lost money.

Fortune Favors the Bold

Boldness paid off in these categories as well. Unrated Kopernik Global All-Cap KGGAX was the best foreign small/mid fund with a 47% gain through Dec. 29, driven by a more than 30% emerging-markets stake. Gold-rated

Winning foreign-stock funds did not have to be so aggressive, but they did have to be willing to depart from the crowd. The Silver-rated and developing-economy-light

Growth suffered, and Artisan's Mark Yockey and team were the poster children. Yockey's flexible approach that tries to combine aggressive, sustainable, and turnaround growth plays in one portfolio can produce an eclectic fund that sometimes looks out of step. This year has been one of those times. All four of his team's funds--Bronze-rated

Neutral-rated aggressive-growth fund

Expect the Unexpected Let this year serve as a reminder not to overreact to either short-term bouts of harrowing performance or tumultuous world events. Those who pared international and emerging-markets exposure after 2015's poor results have missed this year's gains. Those who sold after Brexit and the stunning U.S. election have been unpleasantly surprised by global equity markets' resilience. As always, strive to understand the forces that are affecting a balanced, long-term investment plan, but stick to the plan.