News and analysis from Standard & Poor's MarketScope Advisor
For years, investment advisors have been urging clients to diversify internationally, and, miraculously, those words have not gone unheeded: going back to 2005, a tidal wave of money has been flowing into what the Investment Company Institute calls "World Funds"–equity mutual funds with varying levels of international exposure. Net new cash flow (new sales minus redemptions) for world funds topped $325 million from 2005 to November, 2009, compared with outflows for domestic equity funds of about $190 million over the same period, according to ICI data.
Those shopping for a fund to gain international exposure have plenty of options. There were more than 1,000 unique world funds in business at the end of 2008, according to the ICI, including global (international and U.S.) funds, international (overseas only) funds, emerging market funds, country funds, style funds, and sector funds.
To clear away some of the clutter, we screened out funds that have less than $20 million in assets or aren't open to new investors, and since there were so many, we cut out all those who charge an upfront load. (Many funds have a 2% fee for quick withdrawals, but we left those funds in since most investors won't have to pay it.) We also screened for those that gain a top 5-star ranking from S&P, which looks not only at past performance, but also undertakes an analysis of the future prospects of underlying holdings, as well as expenses and risk, to determine a score, which ranges from 5 (best) to 1 (worst).
With a large number of 5-star funds left, we also choose to remove funds with a U.S. allocation, and funds that were restricted to a particular region, country, style, or sector. There were still dozens of funds left, so we chose four that had strong long-term performance records, a sign of astute management rather than luck, as well as other attractive features such as low expense ratios or a large asset base–indicative of investor popularity.
Most of the international equity funds we found own between 70 and 150 stocks, and charge between 1% and 1.6% in annual expenses. Annual turnover rates of 20% to 50% were common, with assets managed mostly between $1 billion and $10 billion.
One of the largest and best performing funds over the past five years is the Harbor International Fund (HIINX *****), which has a massive $25 billion in assets spread across 72 different holdings. It has returned an average of 8.76% annually over the past five years, almost double the return of the international developed market benchmark, and 14.21% a year since it was opened to individual investors in 2002. The fund says it targets "Europe, the Pacific Basin, and emerging industrialized countries" with France and the United Kingdom its largest country allocations at the end of September 2009, at 18.3% and 14.9% respectively. Energy and banking were the fund's top sectors at about 14% each. At the end of 2009 its top holdings were Brazil's national oil company Petroleo Brasileiro (PBR ***), Brazilian bank Banco Bradesco (BBD NR), and French financial services giant BNP Paribas (BNP Paris ****). Its 1.19% expense ratio is about average.
