Foreign Stock Funds Could Rebound

by Alan Lavine and Gail Liberman

Foreign stock funds have been a disappointment. But particularly now that interest rates are dropping, they could improve.

Rising oil prices, falling currency values and slower economic growth have hurt foreign stock funds. Last year they were down about 18 percent. In six of the last seven years, foreign stock funds have underperformed U.S. stocks.

Nevertheless, financial research has shown that keeping about 20 percent of your fund assets in foreign stock funds and the rest in U.S. stock funds is the way to go. In most years, you should earn about the same as 100 percent stake in U.S. stocks. But you should lose less money on the downside.

Short term, it doesn't always work out that way. Anyone owning international funds in 2000 was disappointed. They lost more than the S&P 500. The idea is to invest for the long term. Over time it works out, reports Ibbotson Associates, Chicago.

Leading foreign stock fund managers are using the downturn in the overseas markets to buy attractively priced stocks with long-term growth potential.

Fidelity Diversified International is one highly regarded foreign fund recommended by the No-Load Investor, an Irvington-on-Hudson, N.Y. newsletter. The fund also is rated five-stars--the highest rating offered by Morningstar. That means it gets a better return with less risk than you would with similar funds.

Over the past five years, the fund has grown at an annual rate of 16.percent, according to Morningstar. It has outranked 93 percent of its peers during that time period. Last year, the fund lost 9 percent. By contrast, the average foreign stock fund lost twice as much.

Gregory Fraser, manager of the Fidelity Diversified International fund, in a recent report, says the fund was hurt by weak foreign currency values. However, the fund outperformed the international stocks for a couple of reasons. It stayed away from Japan. And its Canadian stock performed well.

The fund uses statistical methods to pick the best ranked stocks based on earnings, dividend yields and economic factors. The fund is broadly diversified by industry and country. Twenty-two percent of assets are invested in financial stocks. Energy, technology, and utilities make up 27 percent of assets. Largest holdings include Furukawa Electric, Vodafone Group and Nestle and ING Group.

Alan Lavine and Gail Liberman are husband-wife personal finance columnists, journalists and authors. They are the authors of "The Complete Idiot's Guide to Making Money with Mutual Funds," published by Alpha Books. Their columns appear in newspapers throughout New England and the Southeast, as well as online. Their commentary on mutual funds and personal finance is carried by 200 radio stations nationwide every Sunday over Business News Network's Charles DeRose Financial Advisor Show.

More articles by Al and Gail can be found here.