3 Top World-Stock Funds

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. World-stock funds are incredibly flexible. They can invest in the best companies in the world regardless of where they are based. Joining me to share some favorite world stock actively managed mutual funds is Russ Kinnel. He is Morningstar's director of manager research.

Russ, thank you so much for being here.

Russ Kinnel: Glad to be here.

Benz: Russ, let's just talk about these funds at large. They can invest in foreign or U.S. stocks, and that seems really appealing. But as a practical matter, how do these funds typically allocate between U.S. and non-U.S. stocks?

Kinnel: The typical fund in world stock has slightly more in U.S.; about 52% U.S., 44% foreign, and the rest in cash. So, there is a slight U.S. tilt. Of course, the U.S. has been doing much better than most foreign markets over the last five to 10 years. So, that may also be a bit of simply appreciation or trend-chasing. Maybe the next few years of foreign outperformance, I wouldn't be surprised to see that even up a little more.

Benz: So, that's kind of in line with the global market capitalization. Actually, maybe the U.S. right now, I think, is a little more than 50%. Let's talk about using just an index fund to give you global stock exposure. That's an increasingly viable option, right? There are some good products that do that.

Kinnel: Exactly. You can buy total world stock index funds for very cheap today. Or you can buy an international and a U.S. total market. Glue them together, you get the same thing. Depends how much flexibility you want. But you are right, once again, this is an area that indexing does well.

Benz: But let's look at some of your favorite actively managed funds. Starting with Vanguard Global Equity, the advantage of this one is that it's a good cheap fund, but it is actively managed. Let's talk about what you and the team like about it. It earns a Silver rating currently.

Kinnel: That's right. Vanguard often talks about how it's not active versus passive--it's cheap versus expensive. So, when you have an active fund from Vanguard charging 48 basis points to cover the whole world, that's a pretty good deal. In this case, the fund has two subadvisors, Marathon and Baillie Gifford. Two very good advisors. Marathon is a little more core; Baillie Gifford is a little more growth. So, you kind of end up on that blend/growth line in the style box. But if you look at the long-term results of the fund, they are very strong over the 10- and 15-year period. Again, you have good subadvisors and a very low cost. That's why some of these Vanguard actively managed funds are so appealing.

Benz: Let's look at Oakmark Global. This is a fund that, I think, has a lot of appeal in that we like Oakmark's U.S. funds and we like its international funds. So, it makes sense that they should have a good global fund.

Kinnel: If you think about it, in a way it's almost a complete opposite of what we're talking about--a world stock market index fund that's going to have thousands of securities; this one has just 40. You've got a pair of U.S. managers, a pair of foreign managers. Clyde McGregor, who we know from Oakmark Equity Income; David Herro from Oakmark International. Just 40 names. And they've obviously proven to be very good stock-pickers. So, when you have great stock-pickers covering the world, it's really an appealing package.

Benz: So, I know one thing that you and the team have been keeping an eye on is that Clyde McGregor has announced that at some point in the relatively near future he will retire from the fund. Do you feel like there is a good succession plan in place?

Kinnel: Yeah, there is. Oakmark has got some--I mentioned there are four portfolio managers. So, they've already kind of got the implied successors, really, for both Herro and McGregor on this fund--seasoned managers who we expect to maintain that strategy going forward.

Benz: Causeway Global Value is your last of these three world stock picks. I know that Causeway International Value has been a fund that we've long liked. What about this Global Value do you like, and what gives you confidence in Causeway's ability to manage U.S. equity assets?

Kinnel: Yeah, you're right. So, this is a more recently launched fund--still very small asset base, which is pretty appealing. But they've actually been running a version of this since 2000, and this fund has a good record albeit going back to '08. Though more recently, it hasn't done that well, partly because of its value tilt, partly because it's tilted more towards foreign than the U.S. But it's run by the same managers--Harry Hartford, Sarah Ketterer--in a value strategy that's very appealing. So, on the surface level, you see recent performance isn't that good. But again, there's a lot to like here.

Benz: What's its approach to emerging markets? I know that International Value tends to be mainly developed markets. Does this one avoid emerging markets as well?

Kinnel: Yes, it does. So, it's a little unusual beast as well.

Benz: Russ, always great to get your picks. Thank you so much for being here.

Kinnel: You're welcome.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.