Investors looking to diversify their portfolios with foreign equities can choose from a wide selection of mutual funds with strong track records of low volatility and solid performance. Recently, international equities, especially those from emerging markets, experienced a lot of volatility due to a slump in commodities prices, slowing the economy in China and divergent monetary paths between the U.S. Federal Reserve and the European Central Bank.
As worries about slower global economic growth will likely persist into 2016, investors can still find mispriced investment options overseas with attractive valuations. At the same time, investors should be careful not to underestimate the havoc in worldwide capital flows that can be caused by the Fed's possible decision to raise the interest rate in 2015.
Investing in international equities exposes investors to currency risk, where fluctuations in foreign currencies can wipe out or even make negative favorable returns generated in other countries' currencies. In 2015, many currencies, including the euro, the Japanese yen and the Chinese yuan depreciated against the U.S. dollar, and this trend may persist in 2016. To obtain protection against currency risks, investors can choose funds that hedge their foreign currency exposure.
Assets under management (AUM): $1.5 billion
2010-2015 average annual net asset value (NAV) return: 7.81%
Net expense ratio: 1.04%
The Fidelity International Growth Fund uses a diversified international equity strategy by focusing on large-cap companies with growth characteristics. The fund uses fundamental analysis to select holdings with attractive valuations and high barriers to entry. The fund has a wide geographic dispersion in its holdings with top five countries by asset allocation being the United States (17.61%), United Kingdom (15.14%), Switzerland (14.25%), Japan (14.04%) and Sweden (6.09%). In terms of sector concentration, the fund favors health care stocks with about 19%, while financials sector stocks and consumer staples stocks have 18% and 15% allocation, respectively.
Despite a difficult environment for international growth stocks in 2015, the fund was still able to show better performance than MSCI EAFE Growth Index, the fund's benchmark index. The fund has earned a five-star overall rating from Morningstar and requires a minimum investment of $2,500 and no load fees.
AUM: $709.3 million
2010-2015 average annual NAV return: 16.09%
Net expense ratio: 1.60%
The Oberweis International Opportunities Fund seeks to generate returns that will exceed that of the MSCI World ex USA Small Cap Growth Index. The fund invests in a number of foreign small- and mid-cap stocks of companies that exhibit high growth. The fund's management uses various behavioral finance principles together with the fundamental bottom-up research to select its holdings. The fund has a concentrated position in Japanese stocks with 30% allocation and the United Kingdom with 17% allocation. Other countries represented by the fund's portfolio include Canada, Denmark and Sweden.
Sectors in which the fund allocates its assets include the consumer cyclical sector (24% allocation), health care (17% allocation) and the industrial sector (15% allocation). Morningstar awarded the fund a five-star overall rating in the foreign small/mid growth category. The fund has a minimum investment requirement of $1,000 and no load fees.
AUM: $2.4 billion
2010-2015 average annual NAV return: 7.97%
Net expense ratio: 1.16%
The PIMCO StocksPLUS International Fund (U.S. Dollar-Hedged) Class D seeks to outperform the MSCI EAFE Index by investing in equity-linked instruments of large market-cap stocks to replicate the returns of the underlying index. The fund limits its foreign currency exposure to no more than 20% of its assets by hedging its currency risks. It uses the proprietary PLUS investment strategy and does not directly buy and hold stocks of foreign companies. Instead, it invests in non-U.S. equity derivatives at a money market-based cost, backed by a portfolio of fixed-income instruments by U.S. and foreign issuers. The fund has significant asset allocation to Europe, Middle East and Africa (EMEA) regions with about 65% weight, while Japan accounts for 23% of the fund's portfolio.
Lipper has recognized the fund many times as the best group large equity fund for its consistently solid performance. The fund has a minimum investment requirement of $1,000 and does not charge load fees. The fund has earned a five-star rating from Morningstar within the foreign large blend category.
AUM: $679.4 million
2010-2015 average annual NAV return: 8.01%
Net expense ratio: 0.86%
The Schwab International Core Equity Fund is a foreign large blend fund that invests equities of foreign companies with large- and mid-market capitalization. The fund does not hedge its currency risks. Schwab selects the fund's holdings from the MSCI EAFE Index, its benchmark index, by using evaluating securities based on fundamentals, valuation and momentum. The fund has large equity positions in Japanese stocks (20%), U.K. stocks (19%) and French stocks (10%). Its holdings are fairly well-diversified across numerous sectors, with financial stocks having the largest allocation at about 20%. Other sectors included in the fund's portfolio are consumer cyclicals (15% allocation), consumer defensive (12% allocation) and health care (12% allocation).
The fund comes with a $100 minimum investment requirement and does not charge load fees. For its strong performance, the fund earned a five-star overall rating from Morningstar in the foreign large blend category.
AUM: $2.6 billion
2010-2015 average annual NAV return: 14.24%
Net expense ratio: 1.29%
The Lazard Global Listed Infrastructure Portfolio Open Shares seeks to achieve low-volatility returns by investing in infrastructure companies located worldwide. The fund has overweight positions in stocks in the United States (26%) and Italy (26%), while Australia and France have 13% and 12% allocation, respectively. The fund invests the majority of its assets in various utilities companies (50% allocation) and industrial companies (40%).
The fund requires investors to contribute a minimum investment of $2,500 and has no load fees. It received a five-star overall rating from Morningstar for its strong risk-adjusted returns.
While the outlook for global growth and the overseas market remains challenging, investors still have plenty of opportunities to invest in foreign stocks. International equity mutual funds offer a balanced exposure to a different niche of overseas stock markets at a reasonable cost.