For the past three years, through August, Morningstar’s world stock category of mutual funds returned nearly 14% a year while the funds in the international equities category had annualized returns around 10%. The reason for the wide disparity? World stock funds (also called global stock funds) include some U.S. stocks, which returned well over 17% a year in that period, far better than funds holding only foreign stocks. The superior results from the U.S. positions pushed up returns for global funds.
Longer term, the annualized 10-year returns for world stock funds, domestic equity funds, and international equity funds are all within 80 basis points. Just as U.S. stocks have outperformed recently, there have been and probably will be times when foreign equities excel. If clients invest through funds, is there any reason to include global stock funds? Why not just use domestic funds and foreign funds in their asset allocation?
“There are two ways of looking at whether investors should choose a global stock fund rather than funds limited mainly to the U.S. or to foreign markets,” says Gregg Wolper, lead analyst for world stock funds at Morningstar. “One is in theory. Should funds be constrained by geography? Or can the managers be allowed to invest wherever they see the best opportunity at any particular time, whether that means by country or regional valuations, or simply by looking at individual companies?” Wolper asserts that it seems to make sense to allow good managers to have that sort of freedom rather than limiting their scope. As he points out, there are some high-quality global equity funds that have strong performance records.
The second approach to this issue, according to Wolper, is to look at the more practical level.
“Is it perhaps easier,” he asks, “for a fund manager to focus on one or the other (U.S. or foreign markets), given the thousands of companies available around the world, the different accounting, legal and political factors, and currency factors? There are some great international managers and some lesser-known but still worthwhile funds that are purely foreign, not global. Similarly, there are other top managers who run funds that are purely or very heavily domestic. Investors who look only at fully global funds would shut themselves off from some excellent choices.”
Wolper mentions Dodge & Cox Global Stock and Oakmark Global among notable funds in the world stock category plus Oakmark International and Neuberger Berman International among funds with a foreign focus.
Wolper concludes that both approaches have merit. “An investor who values simplicity and wants just one equity fund might be well served to make it a global equity fund for the sake of diversification,” he says, “but investors who want to choose from U.S. funds on the one hand and foreign funds on the other also can find excellent options. Either approach can work well; the most important thing is to pick funds with the right characteristics.”
The characteristics mentioned by Wolper include experienced management, a consistent strategy, a record of success and reasonable expenses. Funds that can check off all those boxes are likely to pay off, no matter where in the world their stocks come from.
Donald Jay Korn is a Financial Planning contributing writer in New York. He also writes regularly for On Wall Street.