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International-Stock Funds Continue to Prosper

Growth beats value overseas as it has in the United States.

International-stock funds encountered generally favorable conditions in the second quarter of 2017, just as they did in the first quarter of the year.

The currency climate always plays a major role in the performance of funds that invest in foreign equities. The vast majority of such funds normally hedge little or none of their exposure to foreign currencies, so their returns suffer whenever the euro, British pound, Swiss franc, Japanese yen, and other currencies depreciate versus the U.S. dollar.

But the inverse is also true, which helped boost returns for U.S.-based funds investing abroad. The euro and the other major European currencies appreciated versus the U.S. dollar in the second quarter, and stocks in most of the larger markets in the region posted modest to moderate gains amid improving or positive macroeconomic and geopolitical developments, including the decisive and encouraging election results in France. As a result, the typical Europe-stock fund returned 8.4% for the quarter through June 28.

The Japanese yen did decline a little versus the U.S. dollar during the period, but that country's stocks posted solid returns as the labor market improved and domestic demand and consumption strengthened. The average Japan-stock offering, therefore, gained 6.5% in the quarter. The Chinese renminbi has been fairly flat versus the U.S. dollar, and the other emerging-Asia currencies have posted mixed results versus the greenback, while the equities in those markets have generally earned nice gains. Thus, the typical China-region, Pacific/Asia ex-Japan, and diversified Pacific/Asia funds returned 8.6%, 8.1%, and 7.3%, respectively, for the quarter through June 28.

The currencies of many non-Asian markets in the developing world did not appreciate or depreciate very markedly versus the U.S. dollar, and the stocks in those countries fared pretty well overall because of generally good micro and macro conditions. Consequently, the typical diversified emerging-markets fund returned 6.2% this quarter. Brazil was a notable exception, though, as its currency and stocks have struggled because of political and other concerns. Consequently, the average Latin America fund, which has nearly 60% of its assets in Brazilian equities, lost 2.6% for the quarter through June 28, which was the worst performance of any international-stock Morningstar Category.

Foreign small/mid-cap and foreign large-cap funds--which invest approximately 45% to 60% of their assets in Europe, 15% to 25% in Japan, and 5% to 15% in emerging markets--also posted pretty good gains in the second quarter. Growth stocks handily outgained value stocks overseas during the period--as was the case in the United States--while smaller caps returned somewhat more than large caps. Thus, the average foreign small/mid-growth fund, which gained 9.4%, fared the best among these six categories of foreign-stock offerings, and the average foreign large-value fund, which returned 5.8%, did the worst.

A number of prominent international-stock funds performed considerably better than their average peers during the quarter. For example,

Finally, several well-known foreign-stock funds lagged far behind their typical rivals for the quarter through June 28. Bronze-rated

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About the Author

William Samuel Rocco

Senior Analyst, Equity Strategies, Manager Research
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Bill Rocco is a senior manager research analyst, equity strategies, for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He specializes in international-stock and emerging-markets funds and is the lead analyst covering asset managers Harding Loevner, Matthews and Seafarer. Rocco is a member of the Morningstar Analyst Ratings Committee for international-equity funds. He joined Morningstar in 1994 as a mutual fund analyst.

Rocco holds a bachelor's degree in political science from Duke University and a master's degree in comparative politics from Georgetown University.

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