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A Tumultuous First Quarter for International-Stock Funds

Performance of international-stock funds in the quarter varied widely.

International-stock funds faced a topsy-turvy investment environment in the first quarter of 2018. The year started off positively as the generally favorable macroeconomic, geopolitical, and corporate conditions of 2017 persisted. The MSCI ACWI ex USA Index returned 5.6% in U.S. dollar terms in January, while the French, German, Japanese, and several other developed exchanges posted mid-single-digit gains, and the Brazilian, Chinese, and a few other emerging markets earned somewhat higher returns.

But several factors roiled foreign markets in February and March, including rising concerns about inflation and interest rates around the world, growing worries about a trade war between the United States and China, and surfacing company-specific fears in the technology sector. Consequently, most international markets suffered mid- to high-single-digit losses during February and March, with the Brazil and Japanese exchanges performing somewhat better than that, and the Chinese and Indian markets faring slightly worse.

All told, the MSCI ACWI ex USA Index lost 1.2% in U.S. dollar terms in the first quarter. Markets were all over the map in both the developed and the developing worlds during the period. The U.K. and many other European exchanges posted moderate declines, whereas the French and Japanese markets eked out small gains. The South African and several other emerging markets finished in the red. But the Chinese, Mexican, and some other developing markets earned modest gains, while the Brazilian market posted double-digit returns as optimism about economic progress, valuations, and other local factors trumped pessimism about outside considerations.

A Wide Range of Results Not surprisingly, given this volatile and varied investment climate, there was a wide range in the performance of international-stock funds in the first quarter, particularly among those with narrow geographic purviews. The average Latin America fund, which has roughly two thirds of its assets in Brazilian equities and 15% of its assets in Mexican stocks, gained 8.2%, which was the best result of any type of international-stock offering by far. The typical China-region fund returned 1.2%. But the average India equity offering fell 8.4%--the worst performance of any Morningstar Category among international-stock funds by a wide margin--as worries about government spending, slower economic growth, and corporate scandals in India added to global concerns.

The average diversified emerging-markets fund gained 2.0% in the first quarter, whereas the typical Europe stock fund lost a similar amount. The former was buoyed by its exposure to some smaller markets like Thailand and Russia as well as by its exposure to Brazil, China, and Mexico. The latter was burdened by its exposure to several of the region's larger markets, including the United Kingdom, where Brexit-related issues compounded worldwide concerns.

As was the case in the rally of 2017, smaller-cap stocks outpaced large-cap equities and growth stocks fared better than value issues overseas in the choppy first quarter of 2018. (Smaller companies tend to be less dependent on foreign trade and the global economy than large firms, while growth names tend to be less vulnerable to rising interest rates than dividend-paying and many other value issues.) Thus, the average foreign small/mid-growth fund, which gained 2.4%, performed the best among the six foreign-stock Morningstar Style Box offerings during the period, and the average foreign large-value fund, which lost 1.7%, did the worst.

Notable Outperformers and Underperformers

Several prominent international-stock funds did better than most of their rivals during the first quarter.

Finally, a number of well-known foreign-stock funds lagged well behind the majority of their peers during the period. Silver-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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