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A Solid Start to 2019 for International-Stock Funds

The first quarter of 2019 was much better than the fourth quarter of 2018.

There has been some volatility along the way, but international-stock funds encountered a much better investment climate in the first quarter of 2019 than they did in 2018. Indeed, investors became more sanguine about the macroeconomic, geopolitical, and corporate conditions around the world in general--and keen on various developments in certain individual markets. The MSCI ACWI ex USA Index rose 9.9% in U.S. dollar terms for the year to date through March 27 after falling 11.5% in the fourth quarter of last year and dropping 14.2% in 2018 overall.

Investment style and currency exposure were not as impactful in the first quarter of 2019 as they often have been in the past. Sure, many technology and other growth stocks performed relatively well, and the MSCI ACWI ex USA Growth Index was up 11.5% versus 8.2% for the MSCI ACWI ex USA Value Index. But the return of the MSCI ACWI ex USA Small Cap Index was only a tad better than that of the MSCI ACWI ex USA Index. And most foreign currencies did not gain or lose a lot of value versus the U.S dollar, so the MSCI ACWI ex USA Index performed quite similarly in local-currency terms and U.S dollar terms.

The returns of individual markets ranged fairly widely in the first quarter, though. For starters, Canada fared better than most other developed exchanges, gaining 12.9%, as many of its energy stocks flourished. Switzerland and the United Kingdom also outperformed, while Japan lagged with an 8.1% return. What’s more, China led the way in the developing world with a 15.7% gain, thanks to improved sentiment about the economy and other factors. Russia also posted a relatively robust return. But several emerging markets were slowed by local issues and posted relatively paltry gains, including Chile, Brazil, Mexico, and India, which returned between 1.9% and 5.7%.

No Real Surprises Among the Morningstar Categories The six non-U.S. style box Morningstar Categories performed as expected in the first quarter given the investment climate overseas. The foreign large-growth category and the foreign small/mid-growth category posted the best returns, with the former gaining 12.0% and the latter 11.7% in U.S. dollar terms for the year to date through March 27. The foreign large-value category and foreign small/mid-value category earned the worst results, with the former up 8.7% and the latter 9.0%. The foreign large-blend category and foreign small/mid-blend category landed in the middle.

The various regional and single-country categories also posted unsurprising results in the first quarter. The Europe-stock category gained 10.5% versus 8.1% for the Japan-stock category, which trailed all the other international-stock categories except for the Latin America and India equity groups, which returned 4.1% and 3.4%, respectively. After suffering the largest losses of any international-stock category in 2018, the China region category earned the biggest gains in the first quarter, returning 18.2%. And the diversified emerging-markets category--with its positions in weak spots like Chile, Brazil, Mexico, and India, as well as its stakes in strong ones like China and Russia--returned 8.8%.

Notable Outperformers and Underperformers Several well-known international-stock funds performed much better than most of their peers during the first quarter. Bronze-rated Artisan Developing World APHYX returned 20.4% in U.S. dollar terms and outpaced all of its diversified emerging-markets rivals for the year to date through March 27, as its growth bias paid off and several of its Chinese picks soared. Silver-rated MFS International Value MGIAX, which is closed to most new investors, benefited from its ample exposure to technology and other growth stocks as well as its managers' stock selection, and it gained 11.6% while the average foreign large-blend fund returned 9.9%. And Gold-rated Causeway International Value CIVVX returned 10.7% and beat 89% of its foreign large-value peers, because it owns quite a few United Kingdom, Canadian, and Swiss stocks that flourished.

Finally, a number of prominent international-stock funds lagged far behind the majority of their rivals during the period. Bronze-rated Artisan International ARTIX was slowed by some of its Japanese and Indian holdings, and it gained roughly 2 percentage points less than the foreign large-growth category norm of 12.0%. Silver-rated Matthews Pacific Tiger MAPTX, which was hurt by several of its India, Indonesia, and other picks, returned nearly 5 percentage points less than the Pacific/Asia ex Japan category average of 10.5%. And owing to a relatively modest stake in the hot technology sector as well as some disappointing holdings in other sectors, Bronze-rated T. Rowe Price International Disciplined Equity PRCNX returned 8.7% while the typical foreign large-blend fund gained 9.9%.

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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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