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Foreign Stock Funds Outdo U.S. Equals: 4 Picks

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After nearly a decade, foreign stocks are coming to life. Overseas stocks scaled higher this year on expectations that economies and profits will scale higher, while their U.S. counterparts have been dumped on overvaluation concerns. Moreover, investors snap up stocks from all parts of the world as diversification minimizes risks.

Investors, this year, have poured more money into foreign stock funds than what they put into U.S. stock funds. This calls for investing in such sound funds for better returns.

Foreign Stock Funds Beat the Blues

Foreign stock funds have returned a solid 14.9% this year. In fact, funds that focus on stocks from China and other emerging markets have even posted better returns, at about 18.1%. Both, easily top the less than 10% return of the S&P 500’s index funds that tracks U.S. stocks over the same period of time. According to the Investment Company Institute, investors poured $65 billion into world stock mutual funds during the first four months of the year. This is almost triple of what had been invested in U.S. stock funds. BlackRock’s global chief investment strategist Richard Turnill further added that the shift in sentiment has been so intense that investing in markets of Europe and emerging economies has gone from a contrarian move to a consensus one.

For a considerable period of time, managers at Harding Loevner’s Global Equity fund has been favoring U.S. stocks, partly on hopes that President Trump can deliver the promised business-friendly policies including tax cuts, deregulation and uptick in infrastructure outlays. But, of late, they have been cutting back on U.S. stocks as such stocks have become too expensive following a strong run on the bourse. Lately, Robert Boroujerdi, a Goldman Sachs Group Inc (GS - Free Report) analyst said that the so-called “FANG” stocks along with Microsoft Corporation (MSFT - Free Report) “have added a total of $600m of market cap this year, or the equivalent gross domestic product of Hong Kong and South Africa combined”. Now, these fund managers are leaning on stocks from Europe, Japan and across the globe.

Why Are Foreign Funds Attractive?

For many investors, diversification makes their investments safe. When some areas of the world are struggling, other areas are likely to make up for it. Moreover, investors are looking to trim U.S. investments which are getting increasingly expensive. Instead, they intend to put that cash into cheaper foreign stocks. While the U.S. stocks are trading at a more expensive price-earnings ratio of nearly 18, stocks across in China and emerging markets are trading at 12 times their expected earnings per share over the next one year period, as per MSCI indices.

Patricia Ribeiro, portfolio manager at American Century’s Emerging Markets fund, believes that expected earnings growth for emerging markets is stronger than that for U.S. companies. He said “what make us more optimistic are the improving fundamentals: Earnings expectations are not only accelerating this year, but growth rates are higher than for developed markets. And when I’m meeting with company management teams, the tone is very positive in general”.

4 Top Foreign Stock Funds Worth Buying

Banking on such positives, investing in foreign stock funds seems judicious for now. We have, thus, chosen four such funds that flaunt a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy), have positive 3-year and 5-year annualized returns and have minimum initial investments within $5000.

The question here is why should investors consider mutual funds? Reduced transaction costs and diversification of portfolios without the several commission charges that are associated with stock purchases are the primary reasons why investors should park their money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).

Fidelity Advisor Emerging Markets Income A normally invests a large portion of its assets in securities of issuers in emerging markets and other investments that are tied economically to emerging markets. The fund’s 1-year and 5-year annualized returns are 13.3% and 5.7%, respectively. Its annual expense ratio of 0.13% is less than the category average of 1.15%. FMKAX has a Zacks Mutual Fund Rank #1.

Fidelity Advisor China Region A (FHKAX - Free Report) invests the majority of its assets in securities of Hong Kong, Taiwanese, and Chinese issuers and other investments that are tied economically to the China region. It primarily invests in common stocks. The fund’s 1-year and 5-year annualized returns are 31.4% and 10.8%, respectively. Its annual expense ratio of 1.32% is less than the category average of 1.75%. FHKAX has a Zacks Mutual Fund Rank #2.

Fidelity Advisor Japan A (FPJAX - Free Report) invests a major portion of its assets in securities of Japanese issuers and other investments that are economically linked to Japan. It primarily invests in common stocks. The fund’s 1-year and 5-year annualized returns are 22.4% and 9.2%, respectively. Its annual expense ratio of 1.08% is less than the category average of 1.33%. FPJAX has a Zacks Mutual Fund Rank #2.

Putnam Europe Equity A (PEUGX - Free Report) invests mainly in common stocks of large and midsize European companies that the advisor believes have favorable investment potential. It invests the majority of its net assets in European companies and at least 80% of its net assets in equity investments. The fund’s 1-year and 5-year annualized returns are 19.5% and 10.7%, respectively. Its annual expense ratio of 1.32% is below the category average of 1.75%. PEUGX has a Zacks Mutual Fund Rank #2.

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