Overseas, Value Beating Growth

5/19/2014


Among international funds, those investing in value stocks have outpaced growth-oriented funds so far this year — just like their U.S. counterparts. Through May 13, the average foreign large-cap value fund was up 3.0%, versus 0.4% for growth.

It is too early to know if the shift from growth to value will continue. Still, investors seem reluctant to pay a premium for outsized earnings growth and instead favor reasonably valued growers, partly because of expectations for improving economic growth in many regions and a recovery in Europe.

Reversion to the mean also favors value. As shown in the table below, large-cap international growth funds have outperformed value funds in six of the last 10 years, including four of the last five.

FOREIGN FUND PERFORMANCE
Foreign stock funds with a value slant have topped growth funds so far in 2014 and over the past year. That is a reversal from recent trends, as growth funds have gained the upper hand in most years since 2004.
--------------- Total Return ---------------
----- Annualized -----
------------------------------------------ 10-Year History ------------------------------------------
YTD
(%)
12
Mos.
(%)
5
Years
(%)
10
Years
(%)
15
Years
(%)
2004
(%)
2005
(%)
2006
(%)
2007
(%)
2008
(%)
2009
(%)
2010
(%)
2011
(%)
2012
(%)
2013
(%)
Foreign large-cap funds
Blend
1.6
11.1
12.4
6.7
5.0
17.4
14.7
24.8
12.7
(44.0)
31.2
10.2
(14.0)
18.3
19.4
Growth
0.4
9.6
13.2
7.0
5.2
16.2
15.2
24.0
16.3
(46.6)
38.0
14.8
(12.3)
17.7
18.6
Value
3.0
13.7
12.0
6.5
5.3
22.0
13.2
26.0
9.0
(42.4)
30.3
7.5
(12.8)
16.2
20.8
Foreign small and midcap funds
Blend
3.2
16.6
17.1
9.2
6.1
28.7
23.6
27.4
5.6
(45.5)
42.8
21.0
(14.4)
19.0
25.4
Growth
1.3
13.9
18.8
9.9
9.1
24.4
24.9
26.8
12.0
(49.0)
49.2
23.0
(14.7)
22.2
26.6
Value
3.3
17.2
16.2
8.5
8.4
23.9
18.2
26.5
5.0
(47.3)
44.1
21.0
(16.0)
21.4
25.7

Among small-cap and midcap funds, growth-oriented funds have outperformed in nine of the last 10 years. In fact, growth funds have generated superior returns over the last three, five, 10, and 15 years.

Rather than play a game of tug of war between value and growth, proper diversification dictates holding both types of funds. Our top picks — Artisan International ($30; ARTIX) and newly recommended iShares MSCI EAFE Small-Cap ETF ($52; SCZ) — hold both growth and value stocks.

Earning an impressive fund score of 93, iShares MSCI EAFE Small-Cap ETF is taking the place of Wasatch International Growth ($28; WAIGX), which has seen its fund score fall to 65. The ETF, which holds more than 1,300 stocks, has a 25% weighting in Japan and 21% in the U.K. Top sector weightings are industrials (23% of market value), financials (20%), and consumer discretionary (18%). The fund, ranking among the top 1% of its peer group for three- and five-year performance, charges a modest 0.40% annual expense ratio, compared to a category average of 1.57%.

OUR RECOMMENDED MUTUAL FUNDS
Through May 13, our Growth Portfolio has climbed 1.0% for the year, versus 2.8% for its benchmark portfolio. The Conservative Portfolio is up 1.3%, versus a gain of 2.9% for its benchmark.
Year-To-Date *
--- % Of Portfolio ---
 
Fund (Price; Ticker)
Return
(%)
Rank
Conser-
vative
(%)
Growth
(%)
Fund
Rating †
Artisan International ($30; ARTIX)
(0.8)
E
9
9
75
Dreyfus Midcap Index ($38; PESPX)
2.3
C
0
0
46
Dreyfus Small Cap Stock Index
($29; DISSX)
(2.1)
D
0
0
93
Fidelity High Income ($9; SPHIX)
3.1
E
5
4
47
Homestead Small Company
($37; HSCSX)
(0.2)
B
5
8
79
iShares MSCI EAFE Small-Cap ETF
($52; SCZ)
2.6
D
7
8
93
PIMCO Total Return ETF
($108; BOND)
3.5
B
6
0
NA
T. Rowe Price Divers. Small-Cap Growth
($24; PRDSX)
(3.8)
B
9
9
96
T. Rowe Price Value
($35; TRVLX)
5.1
A
8
9
74
Thompson Bond ($12; THOPX)
2.7
A
6
0
95
Vanguard 500 Index ($175; VFINX)
3.4
B
6
7
80
Vanguard Dividend Growth
($22; VDIGX)
3.1
C
12
12
95
Vanguard GNMA ($11; VFIIX)
3.3
A
0
0
95
Vanguard Growth Index
($49; VIGRX)
2.0
A
11
11
93
Vanguard Inter.-Term Tax-Exempt
($14; VWITX)
4.2
B
0
0
92
Vanguard Selected Value
($29; VASVX)
2.7
D
5
7
93
Vanguard Short-Term Invest.-Grade
($11; VFSTX)
1.4
A
0
0
98
Vanguard Total Bond Mkt. Index
($11; VBMFX)
3.1
C
0
0
51
Vanguard Wellesley Income
($26; VWINX)
4.2
A
0
0
98
Vanguard Wellington ($39; VWELX)
4.1
A
6
9
99
Wells Fargo Advantage Discovery
($31; STDIX)
(8.4)
E
5
7
44

* Year-to-date ranks through May 13 from Morningstar, comparing performance among funds with same objectives. A = top 20%; B = next 20%; C= middle 20%; D = next 20%; E = bottom 20%.
† Fund ratings are percentile ranks based on our fund-rating system.


Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com