Foreign Stocks Strong This Year

5/4/2015


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The MSCI EAFE Index — a popular stock index used to gauge performance outside the U.S. and Canada — has rallied 9.6% so far in 2015, versus a mere 2.7% for the S&P 500 Index.

Heading into this year, the outlook for many foreign markets seemed uninspiring. In Europe, concerns regarding a potential recession, deflation, and stagnant growth were expected to weigh on stocks. Meanwhile, China's economic growth was cooling off, and many developing economies were sputtering.

What changed in 2015?

• For one thing, investors seeking bargains have moved money overseas, where stocks are generally cheaper than U.S. stocks based on such valuation ratios as price/earnings and price/book.

• Next, investors have warmed up to Europe, spurred by optimism that the European Central Bank will help jump-start the region's economy through massive bond buying, called quantitative easing. In 2015, gross domestic product for the European Union is expected to grow 1.7%, up from 1.3% last year. For 2016, growth is expected to reach 2.1%.

• Lastly, many emerging-market economies are still expected to outgrow most developing economies, luring investors to select countries, including China, Argentina, and India.

This year's solid returns have some investors rethinking their allocation to foreign stocks. Not surprisingly, money has poured into international stocks and exited U.S. stocks. Through April 22, world stock funds had seen inflows of roughly $41 billion, versus outflows of nearly $14 billion for U.S. stock funds, according to Investment Company Institute.

As a general rule, we recommend you invest 20% to 25% of the equity portion of your portfolio in international stocks. For most investors, the best way to own foreign stocks is to buy a mutual fund or exchange-traded fund (ETF). International funds typically offer diversification benefits you can't get by investing in U.S.-based multinational companies because true foreign stocks are less correlated to the U.S market. Below we review two foreign picks from our recommended portfolios:

A longtime favorite, Artisan International ($32; ARTIX) is tilted toward large-cap growth stocks. At the end of March, Germany was the largest country exposure with nearly 17% of assets. Roughly 22% of the fund was invested in consumer-discretionary stocks. Up 7.2% so far in 2015, the fund ranks among the top 11% of its category for three-, five-, and 10-year returns.


iShares MSCI EAFE Small-Cap ($52; SCZ), a top pick among ETFs, has rallied 12.1% this year. On April 28, top country weightings were Japan (30%), United Kingdom (22%), and Australia (6%). Major sector weightings are financials (22%) and industrials (22%). The fund charges only 0.40%, yields roughly 2.5%, and has a five-year annualized return of 10.2%.

SELECT FOREIGN STOCKS AND FUNDS
---------------- Quadrix Scores ------------------
Company (Price; Ticker)
Momen-
tum
Value
Perfor-
mance
Overall
Headquarters
Stocks 
Accenture ($94; ACN)
41
55
71
66
Ireland
Magna Int'l ($52; MGA)
55
92
58
94
Canada
Manulife Financial ($18; MFC)
75
99
44
90
Canada
Mylan ($75; MYL)
68
34
94
71
United Kingdom
Schlumberger ($94; SLB)
17
66
43
57
France
Shire ($245; SHPG)
87
47
88
95
Ireland
         
-- Total Return --
Fund (Price; Ticker)
Fund
Score
YTD
(%)
3 Yrs.
(Ann.)
(%)
Exp.
Ratio
Category
Funds 
Artisan Int'l ($32; ARTIX)
91
7.2
13.0
1.17
Large Growth
Fidelity Overseas ($43; FOSFX)
99
13.0
14.5
1.04
Large Blend
iShares MSCI EAFE Sm.-Cap
($52; SCZ)
83
12.1
12.7
0.40
Small/Mid. Gro.
Vanguard FTSE Devel. Mkts.
($42; VEA)
90
11.8
11.6
0.09
Large Blend
Vanguard Int'l Explorer
($18; VINEX)
100
12.1
13.4
0.40
Sm./Mid. Blend
Vanguard Int'l Value ($38; VTRIX)
93
11.1
11.5
0.44
Large Value
Note: Quadrix and fund scores are percentile ranks, with 100 the best.

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