Seven Super Foreign Funds

Choosing where to invest these days is a little like having to choose a favorite child. All the world’s economies are on an upswing, including the U.S. economy. But growth in foreign countries is expected to outpace domestic growth. The International Monetary Fund predicts the U.S. economy will grow 2.9% in 2018; meanwhile, foreign economies (developed and emerging) are pegged for 4.9% growth, with some, including China and India, expected to expand 6.6% or more. “We’re seeing sustained above-average growth across all global markets,” says Richard Turnill, a BlackRock investment strategist.

These seven funds can help you take advantage of the best opportunities in growing world economies. Some of the funds focus on the developed world, others invest only in emerging countries, and some cover both.

Currency is a wild card with international investing. Foreign currencies can boost returns when the dollar is weak (because overseas gains translate into more greenbacks here) and squeeze returns when the buck strengthens. Many fund managers hedge against currency fluctuations, which can help performance in the short term. But over the long haul, funds that hedge tend to perform in line with funds that don’t hedge–so hedging is a wash. None of the funds below hedge against currency swings. Returns and other data are through May 18.

AMG TimesSquare International SmallCap Fund (symbol TCMIX, expense ratio 1.05%). Even in a world of strong, synchronized economic growth, uncertainty looms, says Magnus Larsson, who manages this fund with Robert Madsen. Among the worries: trade tensions, an aging bull market in the U.S., and post-Brexit adjustments in Europe and the U.K. But shifting environments create opportunities, Larsson says.

Earlier this year, Larsson and Madsen had feet on the ground (either their own or their analysts’) in Australia, Dubai, Indonesia and Japan. The team focuses on small and midsize foreign firms, investing in what Larsson calls exceptional companies–firms that stand out in their industries. The fund’s top three countries: Japan, the U.K. and Italy.

Since the fund opened in 2013, TimesSquare International SmallCap–a member of the Kiplinger 25, the list of our favorite no-load funds–has gained 14.5% annualized. That beats the 12.1% return of the MSCI EAFE Small Cap index.

Baron Emerging Markets (BEXFX, 1.38%). Despite a recent pause in emerging-markets stock gains, Baron Emerging Markets manager Michael Kass says we’re still in the “early innings” of a rally, thanks to healthy economies, strong earnings, political stability and structural reforms–particularly in China and India.

Analysts expect firms in the developing world to post 15% earnings growth in 2018, compared with 7% in developed foreign countries. And emerging-markets stocks, historically bargains relative to U.S. stocks, are trading at greater discounts than in recent years, with an average price-earnings ratio of 11.7 times estimated 2018 earnings, compared with P/Es in the U.S., Europe and Japan of 16.6, 14.0 and 13.2, respectively.

Kass has managed Emerging Markets, a Kip 25 fund, since the end of 2010. Its 5.9% annualized return over that period blows past the 2.3% return of the MSCI Emerging Markets index. Kass focuses on firms poised to benefit from broad growth trends. He invests a hearty chunk of the fund’s assets in China (32%) and India (19%).

Fidelity International Growth (FIGFX, 1.03%). The ideal investment for manager Jed Weiss is a large, growing firm with good long-term prospects, a well-fortified position in its industry, and an attractively priced stock. But “you rarely find all three,” he says.

Lately, he has hit the trifecta in Japan, which claims 14% of the fund’s assets (its biggest foreign-country weighting). Prices have risen over the past year, but Weiss says he can still find opportunities. Recently, he added Nabtesco, a diversified industrial giant, to the portfolio, and he beefed up stakes in USS, which runs used-car auctions.

International Growth, a member of the Kip 25, climbed 5.5% annualized over the past three years, which beats the 4.5% gain of the MSCI EAFE index.

Hennessy Japan (HJPNX, 1.47%). Try this fund for a concentrated bet on Japan. The country’s economy is moving in the right direction, thanks to the fiscal and corporate reforms that prime minister Shinzo Abe initiated more than five years ago. Hennessy Japan lead manager Masakazu Takeda says corporate profits are “robust.” Many firms are reinvesting in their core businesses, he adds, which bodes well for future growth. And Japanese stocks are less expensive relative to stocks in the rest of the developed world.

Takeda manages a small but diverse portfolio of 23 stocks. Among the top 10, for example, are a media firm (Recruit Holdings), a medical-device maker (Terumo) and a bike-parts maker (Shimano). Hennessy Japan outpaced the MSCI Japan index in all but one of the past 10 calendar years.

Matthews Asia Innovators (MATFX, 1.24%). Investors who want to tap into Asia’s fast-growing economies should consider Matthews Asia Innovators. Lead manager Michael Oh and two comanagers invest in firms with cutting-edge products or technology. “In South Korea, biopharma firms are among the most innovative,” says Oh. “In India, it’s private banks.” Among the fund’s top holdings are India’sHDFC Bank and Chinese tech giant Tencent. China, South Korea and India are its biggest country exposures.

Since Oh took over the fund in 2006, it has returned 9.4% annualized, which beats the 8.2% return of the MSCI All Country Asia ex-Japan index over the same period.

Vanguard International Growth (VWIGX, 0.45%). International Growth has been on fire. Its 24.8% one-year return beats 95% of its peers (funds that invest in large, growing foreign companies). A healthy dose of emerging-markets stocks (22% of the fund’s assets), mostly Chinese internet firms, helped.

Two firms run the fund. At Baillie Gifford Overseas, which manages 60% of the fund’s assets, managers are concentrating on two themes: China and technology, both of which are expected to drive growth for decades. At Schroder Investment Management North America, manager Simon Webber favors high-quality firms such as AIA, a Hong KongÐbased insurer with a growing business in China.

Baillie and Schroder have run International Growth together since mid 2016. Over that stretch, the fund has returned a cumulative 50.9%, which tops the 30.7% gain of the MSCI All Country World ex USA index.

Fidelity New Markets Income (FNMIX, 0.82%). Fixed-income investors should explore overseas opportunities, too, but they should temper optimism with caution, says John Carlson, who manages this Kip 25 fund. A stronger dollar and rising U.S. interest rates have roiled emerging-markets debt of late. But Carlson says he expects a “more stable investing environment going forward.” What’s more, emerging-markets government debt currently yields 5.0%. That’s far more than 10-year government bonds in France, Germany and Japan, all of which yield less than 1%, or in the U.S., where the 10-year Treasury note yields 3.1%. Emerging-markets debt isn’t the bargain it was in late 2008, “but there’s still a lot of value,” he says.

Carlson blends big-picture economics with detailed credit analysis and invests mostly in emerging-markets government debt. New Markets Income lagged its peers over the past year, but over the past decade, its 6.9% annualized return beat the JPMorgan Emerging Markets Bond index, which gained 6.3% a year. The fund yields 4.64%. Its duration, a measure of interest-rate sensitivity, is 6.6, which implies that if rates were to rise a full percentage point, the fund would lose 6.6% in net asset value. The EM Bond index has a duration of 7.2.

Seven more picks with global flair

For a broad take on foreign stocks in developed and emerging countries, we favor Vanguard Total International Stock, available as a mutual fund (symbol VGTSX, expense ratio 0.17%) or an exchange-traded fund (VXUS, 0.11%). For exposure to small foreign firms, try Vanguard FTSE All-World ex-US Small-Cap Index (VFSVX, 0.25%; VSS, 0.13%). Our favorite emerging-markets ETF is iShares Core MSCI Emerging Markets ETF (IEMG, 0.14%).

For smaller slices of a fast-growing part of the world, Vanguard FTSE Pacific ETF (VPL, 0.10%) covers Japan, Australia, South Korea and Hong Kong, plus other countries (but not China). IShares MSCI Europe ETF (IEUR, 0.10%) holds stocks in developed nations, including the U.K., France and Germany. For a single-country fund, consider iShares MSCI Japan ETF (EWJ, 0.49%). First Trust Chindia ETF (FNI, 0.60%) invests 60% of its assets in China and 35% in India.

This article provided by NewsEdge.