Plenty of advisors shun global funds, which own a mix of U.S. and international stocks. The problem is that global portfolio managers can adjust their allocations, holding 40 percent of assets in the U.S. one year and 60 percent the next. That turns off many advisors who prefer setting their own allocations and using dedicated international funds.
To be sure, most global funds are not worth considering. Many funds produce mediocre results by assembling collections of blue chips from around the world. But there are a few top managers who make the most of their freedom to shop anywhere. These global managers have emerged as stars, expert allocators who can shift assets abroad at the right times. “If a smart manager can go anywhere in the world, he can find bargains that other funds can't touch,” says Randy Linde, a financial advisor in Seattle with Ameriprise Financial.
Advisors who buy the top funds may well decide to sit back and enjoy the ride, letting the manager shift allocations. Then, instead of spending time deciding whether to overweight Korea or Austria, the advisor can focus on providing overall financial planning for clients.
Even if you generally want to make allocation decisions yourself, a global fund can be a convenient choice for a child or someone with a limited portfolio. With one fund, the client can get immediate diversification. For clients with substantial portfolios, global funds may not be any more cumbersome to use than dedicated domestic funds. These days many so-called domestic portfolios are reaching overseas. Popular domestic funds with more than 20 percent of their assets abroad include Fidelity Contrafund, Longleaf Partners and American Funds Fundamental. The point is: Whether you buy a global or more specialized fund, you must still monitor the holdings to avoid any unintended overweightings and redundancies.
Those who want to try a go-anywhere global fund should consider Oakmark Global. The fund has scored big gains by taking contrarian positions, buying unloved stocks. While many investors were focusing on large-cap U.S. stocks in 1999, Oakmark had 60 percent of its assets in the U.S. — but with most of the holdings in small value names. As the small value stocks began soaring after 2000, Oakmark shifted to large European companies, which seemed more promising. By 2005, the fund had only 30 percent of its assets in the U.S, and Oakmark benefited from strong overseas markets.
A big holding now is GlaxoSmithKline, the British pharmaceutical giant. With investors concerned that not enough new drugs are coming to market, the pharmaceutical company has lagged for years. But the fears are overdone, says Robert Taylor, an Oakmark portfolio manager. “Glaxo still has very strong profit margins, and the company will eventually bring more new drugs to market,” he says.
Another top fund is Polaris Global Value. Polaris typically has half its assets in the U.S. But, currently, fund manager Bernard Horn only has 38 percent of assets in domestic stocks because, he says, overseas markets seem to hold more bargains. Horn starts with a universe of 24,000 stocks and screens for companies with steady cash flows and low prices. He then buys equal positions of about 75 stocks, always including companies from at least 15 industries and 15 countries. The result is a diversified portfolio that has proved resilient in downturns. “A lot of our companies are solid businesses, but nobody cares about them because they are in boring businesses,” says Horn.
Early this year, Horn began noticing that many Japanese domestic companies were appearing on his screens. With Japan's economy starting to turn up, cash flows were improving at many companies. He began buying shares of Japan Railway. “As the economy grows, the railroad should see low single-digit growth in the number of passengers,” he says. “That's not bad for a company that has been ignored for years.”
To diversify a portfolio that is heavy with large-caps, consider Templeton Global Smaller Companies. The fund looks for the small- and mid-cap stocks that are the most undervalued considering their outlook for the next five years. The fund currently has about 20 percent of assets in the U.S., double the figure from two years ago. Portfolio manager Tucker Scott goes wherever he finds the best bargains. Five years ago the fund looked like a deep-value specialist, holding many old-economy stocks that sold at big discounts. Today, the portfolio is more focused on unloved growth stocks, says Scott. The average holding in the fund has reported double-digit annual earnings growth. “We haven't changed,” says Scott. “The world has changed and provided us with a different set of opportunities.”
A big holding is Vestas Wind Systems, a Danish maker of wind turbines that is reporting rapidly growing sales. With the rising cost of oil, wind is now cost competitive with many traditional power producers, says Scott.
Another fund that focuses on small and mid-cap stocks is Evergreen Global Opportunities. The fund always keeps at least 30 percent of its assets in the U.S., but portfolio manager Francis Claro varies the allocation to take advantage of bargains. Last year he raised the U.S. portion to 40 percent, worried that international stocks were becoming a bit rich after several years of strong performance.
Claro seeks growing companies that are showing improving performance. In some cases, the businesses suffered disappointments in the past, and the stocks were battered. “We like to find inflection points, where the earnings or sales are beginning to improve dramatically,” he says.
A big holding is Ashtead Group, a British company that provides rental equipment, like forklift trucks. The earnings suffered several years ago when the European economy turned sluggish. With construction healthy now, earnings have been climbing, and sales are growing at an annual rate of more than 20 percent.
Another top growth fund is Oppenheimer Global Opportunity. Portfolio manager Frank Jennings isn't afraid to place big bets on stocks and regions that seem poised to deliver strong growth. Currently he jokes that his favorite country is California, home to a number of fast-growing technology and biotechnology companies. A big holding is chipmaker Advanced Micro Devices. “They have a superior product that will continue taking market share away from Intel,” says Gavin Dobson, Oppenheimer's global equity strategist.
Oppenheimer is willing to bet on currencies as well as stocks. When many traders figured that the dollar was bound to fall in 2005, portfolio manager Jennings believed that the U.S. economy would remain strong, and he increased dollar exposure. The move proved on target as the greenback climbed, demonstrating how a skilled global manager can boost returns by making the right calls.
|Fund||Ticker||1-Year Return||3-Year Return||5-Year Return||5-Year % Category Rank||Maximum Front-End Load|
|Evergreen Global Opportunities||EKGAX||35.3%||30.4%||13.5%||3%||5.75%|
|Oakmark Global I||OAKGX||21.8||22.4||17.0||1||0|
|Oppenheimer Global Opportunities A||OPGIX||32.7||29.9||12.3||6||5.75|
|Polaris Global Value||PGVFX||21.0||24.6||16.4||1||0|
|Templeton Global Smaller Companies A||TEMGX||19.7||27.1||14.8||2||5.75|
|Source: Morningstar. Returns through 5/31/06.|