Article data as of February 25, 2014
While mutual fund flows to U.S. equities have been uneven during 2014, with a mix of outflows and inflows on a weekly basis, international equity flows have been both strong and steady. Indeed through mid-February, more than $3 billion has been added each month. We believe the optimism is a combination of signs of economic improvement along with how the international markets look relative to the U.S.
The eurozone's economy grew 0.3% in the fourth quarter of 2013, up from 0.1% in the third quarter, according to a mid-February report from Eurostat, the European Union's statistics office. Factoring in the whole 28-nation European Union, including the United Kingdom, growth in the fourth quarter was 0.4%. Meanwhile, in Japan, during the fourth quarter, the Cabinet Office said the local economy grew 0.3%, the fourth successive quarter of economic growth.
Of course not all international markets can be viewed equally and many mutual funds make bottom-up selections based on the fundamentals and valuation traits of individual stocks regardless of where they are traded. But for investors seeking to augment their portfolios with international equity funds, there are a lot of choices. Indeed, S&P Capital IQ has rankings on more than 2,500 mutual fund share classes in our International Equity category.
We decided to focus on well-diversified large-cap funds that are already widely held by investors. We screened for five-star ranked international mutual funds with more than $10 billion in assets under management. There were just six funds that met the criteria, but two are closed to new investors and a third focuses on emerging markets. Below are the three remaining funds.
Dodge & Cox International Fund (DODFX 43 *****)
This large-cap core fund was the best performing fund in its peer group in 2013, rising 26%, despite having more than $50 billion in assets. While the fund was nearly as strong in 2010 and 2012 on a relative basis, the fund has significantly lagged in the past when international equities were out of favor, namely in 2011. The fund's standard deviation is above average, but we view favorably its 0.46 Sharpe ratio that was higher than the 0.36 average. At year end, the fund had 62% in developed Europe and another 15% in developed Asia, with most of the remainder in emerging markets. Financials, Information Technology and Consumer Discretionary stocks were widely held in the portfolio. Further helping the fund's top ranking are a low 0.64% expense ratio and a 10% turnover rate.
Fidelity Diversified International Fund (FDIVX 37 *****)
This $15 billion large-cap growth fund was also stronger than its peers in 2012 and 2013, while lagging in 2011, though the volatility of the fund was more muted than DODFX. Developed Europe was recently 57% of assets as the fund had more developed Asia exposure (23%) and more limited emerging market investments than DODFX. From a sector basis, Financials, Consumer Discretionary and Health Care stocks were well represented in the portfolio. The fund's five star ranking is also helped by the long tenure of manager William Bower and a below-average 0.95% expense ratio.
Artisan International Fund (ARTIX 30 *****)
This large-cap growth fund outperformed its peers in each of the last three calendar years, including a modest 7% decline in 2011. While ARTIX's regional exposure looks more similar to DODFX than FDIVX, with 67% of assets in developed Europe and 19% in developed Asia, the sector exposure is notably different. Industrials and Consumer Staples stocks have the heaviest weightings, followed by Consumer Discretionary stocks. While this fund is the most expensive of the three, with a 1.2% expense ratio, this is still lower than the peer average. Meanwhile, fund management, led by Mark Yockey, has been in place for nearly two decades. The share class for this fund had $11 billion in assets under management.
To see reports on these international offerings, visit the Funds tab of MarketScope Advisor.
Todd Rosenbluth - S&P Capital IQ Director of Mutual Fund Research
Positive Potential Implications: DODGE & COX INTERNATIONAL STOCK FUND [DODFX 43.48 *****
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