Christine Benz: Hi, I'm Christine Benz for Morningstar.com. U.S. stocks have outperformed foreign for several years running, but it may be time to give your foreign funds a boost. Joining me to discuss this topic is Russ Kinnel. He's director of manager research for Morningstar. Russ, thank you so much for being here.
Russ Kinnel: Good to be here.
Benz: Russ, if investors have foreign-stock funds in their portfolios as well as U.S. stock funds, they have probably seen the contents of their portfolios jostled around a little bit over the past five years. And they've probably seen the U.S. piece grow as a percentage of their portfolio. Why should investors think about perhaps shifting things around and maybe redirecting some new assets to foreign-stock holdings?
Kinnel: I can see a couple of reasons, Christine. One is simply that, generally, that means the underperforming area has gotten a little cheaper. We heard David Herro on Morningstar.com talking about how Europe is the cheapest place to invest right now. So, valuation is one reason. Another reason is simply that a lot of the best companies are outside U.S. borders. I think many multinationals, of course, give you exposure to a lot of different markets. So, it's not as clean cut as U.S. and foreign, in reality. But again, why would you want to ignore all the good companies outside the U.S.?
Benz: So, put recent performance aside and think about globalizing that portfolio. You brought several ideas for people who may want to tip additional monies into some foreign-stock funds. One is just a pure play, Vanguard Total International Stock Index (VGTSX). Let's talk about the attributes that it has going forward. Obviously, it has very low costs.
Kinnel: That's right. It starts with low costs and, of course, it's very broad based. This particular fund has more emerging markets than you get from most index funds or most foreign large-blend funds. Its benchmark is 15% emerging markets. If you throw in South Korea and Taiwan, you are up to 20% emerging markets, depending on whether or not you count those. But the point being that emerging markets are apparently relatively cheap by most people's view. So, you're getting Europe and emerging markets all at relatively low valuations relative to the U.S. So, you're really covering a wide base. This makes a really nice core holding.
Benz: Historically, has that large emerging-markets stake added to volatility in this fund versus some other competitor funds?
Kinnel: For sure. If you are comparing it with a pure developed-market index, it's going to have more volatility. But again, you also are getting greater exposure to a wider swath. And obviously, there's the potential for superior growth in emerging markets, so I think it's worth that added volatility.
Benz: Just make sure you have a nice, long time horizon.
Kinnel: That's right.
Benz: Another idea that you brought is Harbor International (HIINX). I know it's long been one of our favorite funds. Let's talk about why you think this fund is still well worth a look.
Kinnel: That's right. This is a fund that's subadvised by Northern Cross, and it's run by a group of managers who are really valuation-sensitive. They tend to look for, sometimes, resources companies, other turnarounds, and they've just done a tremendous job over a long time. It's a very patient fund, tends to be 20% turnover, pretty low cost--particularly if you can buy the share class with a $50,000 minimum. So, it's a really appealing fund. The performance has been a little slow over the last couple of years because of those [basic] materials and other stocks. But again, those things go through cycles, so I wouldn't rule them out.
Benz: Then finally, Causeway International Value (CIVVX) is also toward the top of your list in terms of funds that investors should have on their radar. Let's talk about the positive attributes there.
Kinnel: Sarah Ketterer and Harry Hartford have run the fund for a long time, and they ran another fund before that. So, we really have a long track record of superior performance from these managers. They are conservative value investors who really have built a strong record. They will buy financials, and you can see in '08 the fund lost almost as much as its peers. So, that's not to suggest that it's risk-free, but generally they have had very few down years relative to their peers. It has just been a very nice, consistent value performer. This fund is a little different from the Vanguard Fund in that it doesn't have anything in emerging markets. So again, it kind of depends on what fits your portfolio needs best.
Benz: And how about the Harbor Fund? Where does that one stand relative to emerging markets?
Kinnel: They do have some emerging markets. Some of those materials stocks will come from emerging markets. They've even invested in Russia from time to time. So, it's somewhere in between.
Benz: And the two active funds also have some version of a value strategy presumably that puts them in a pretty good spot to potentially capitalize on undervaluation in foreign markets.
Kinnel: That's right. It has really worked nicely for both funds. You can see that over a long time they've really compounded returns at a great rate. It would be great if they do as well in the future; but even if they don't quite live up to that, that still would be a really nice result.
Benz: I know year-end is oftentimes the time when investors rebalance their portfolios. Here are some good ideas for investors who might decide that they are light on foreign-stock funds.
Benz: Russ, thank you so much for being here.
Kinnel: You are welcome.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.