A street scene in Sheung Shui, China, in January.
Peter Parks/AFP/Getty Images
After a decade of lagging behind the
S&P 500,
foreign markets have been on a roll, supercharged by China’s abandoning its zero-Covid policy and a warm European winter that has helped the eurozone avoid a recession despite the war in Ukraine.
The 14% gain in the iShares MSCI Eurozone exchange-traded fund (ticker: EZU) and the 13% increase in the
iShares MSCI China ETF
(MCHI) so far this year have beaten the S&P 500’s 7.7% rise.
Some strategists see a bigger shift at hand as some of the megacap U.S. tech stocks that have dominated markets over the last decade face increasing challenges. That could create more of a level playing field for foreign markets.
The U.S. economy is also facing a slowdown. No one knows whether the Federal Reserve can steer it to a soft landing, or whether the bank’s aggressive rate increases to battle inflation will result in a recession. .
But investors are looking to diversify in any case, especially as the economic picture in China and emerging markets begins to improve. European companies stand to gain because they have more exposure to Chinese sales than their U.S. brethren.
The flow of investment money highlights the change in sentiment. So far this year, the net inflow of cash into global equity funds has totaled $40 billion, according to analysts at Bernstein. Accelerating inflows into emerging markets accounted for a large part of those inflows, with $28 billion so far this year.
Finding a good international equity fund isn’t easy. Many are pricey and come with front-load charges. A majority also have little to no exposure to China or Latin America, an area that stands to benefit from Beijing’s decision to reopen and the increased demand for commodities it will bring, not to mention companies’ efforts to diversify their manufacturing bases.
Barron’s took a look at the options by screening MorningstarDirect for international equity funds that had at least a three-year record and were still open to new investors. We narrowed the group to those that allocated at least 45% of their money to Europe, but also had a total of least 10% in Latin America and China. That left us with about 21 funds for investors to research if they are looking to increase their allocations abroad.
| Fund name/Ticker | % of fund assets in China | % in Latin America | % in Europe |
|---|---|---|---|
| American Century Non-US Intrinsic Value/ANVLX | 11.34 | 4.28 | 68.31 |
| Brandes International Equity/BIEAX | 2.57 | 8.86 | 64.49 |
| Virtus KAR International Small-Mid Cap/VISAX | 7.10 | 5.27 | 60.23 |
| Dodge & Cox International Stock/DODFX | 5.66 | 4.29 | 57.22 |
| Hartford International Opportunities/IHOAX | 11.18 | 0.94 | 55.93 |
| American Funds International Growth & Income/IGAAX | 6.30 | 4.23 | 55.34 |
| Delaware Ivy International Core Equities/IVIAX | 8.31 | 3.32 | 55.08 |
| JHancock International Growth/GOIGX | 13.10 | 1.03 | 53.44 |
| Lord Abbett International Equity /LICAX | 6.36 | 4.00 | 50.59 |
| Longleaf Partners International/LLINX | 6.77 | 6.08 | 50.39 |
| Vanguard International Growth/VWIGX | 12.53 | 5.00 | 48.80 |
| Janus Henderson International Opportunities/HFOAX | 11.18 | 3.03 | 48.69 |
| Optimum International/OAIEX | 8.66 | 3.64 | 48.41 |
| Invesco EQV International Equity/AIIEX | 5.50 | 4.36 | 48.35 |
| Vanguard International Value /VTRIX | 9.02 | 3.31 | 48.12 |
| Baron International Growth/BIGFX | 9.86 | 4.93 | 47.79 |
| Harding Loevner International Equities/HLMNX | 9.16 | 3.76 | 46.51 |
| MFS Blended Research International Equities/BRXAX | 10.05 | 3.74 | 46.32 |
| T. Rowe Price Spectrum International Equities/PSILX | 10.86 | 2.87 | 45.70 |
| Fidelity® Global ex US Index/FSGGX | 8.98 | 2.44 | 44.87 |
| Fidelity® Flex International Index/FITFX | 8.99 | 2.45 | 44.87 |
Source:MorningstarDirect
Among the cheaper options is the Fidelity Global ex-US Index fund (FSSGX), which charges 0.65%. By country, the passive fund’s top exposure is Japan, where it holds 14% of assets, with the U.K. close behind with 9.5%. Both are less than the category average. The fund also has heftier stakes in China, India, and Taiwan than its peers.
Top holdings include Taiwan Semi and
Samsung Electronics,
as well as companies geared toward a China recovery, with a stake in luxury maker
LVMH
(MC. France. It holds the online gaming company
Tencent Holding
(700. HongKong), which should benefit as Chinese policy makers ease up on the regulatory pressure that has weighed on the stock for three years.
The Vanguard International Growth (VWIGX) fund with an expense ratio of 0.45% is the cheapest option. The actively managed fund has almost 13% invested in China and 5% in Brazil, heavier allocations than its peers. Top holdings include the Dutch chip equipment maker ASML (ASML);
Taiwan Semiconductor Manufacturing
(TSM); the luxury-good maker Kering (KER. France), which could benefit from a revival in Chinese consumer demand; and renewables companies such as
Vestas Wind Systems
(VWDRY).
Among the active managers on the list, Brandes International Equity fund (BIEAX) had one of the larger allocations to Latin America at almost 9%, with more invested in Brazil and Mexico than its peers. The fund holds several global financial companies that have benefited as interest rates rise, as well economically-sensitive companies like German cement maker
HeidelbergCement
(HEI. Germany). The value-oriented fund’s 1.12% expense ratio also puts it at the lower end of the spectrum for international active funds, according to
Morningstar.
The Baron International Growth fund (BIGFX) also has a heftier allocation to China, India and Brazil than peers. It diverges away from its benchmark index, favoring companies with asset-light business models whose founders have significant stakes.
As the evolving U.S.-China relationship and Russia’s war in Ukraine force a rethink of globalization, fund manager Michael Kass expects an increase in investment spending as companies and countries rethink supply chains and production hubs. That type of investment spending tends to correlate with international outperformance since these economies and markets are tilted toward the types of companies that should benefit from such spending.
Write to Reshma Kapadia at reshma.kapadia@barrons.com
Credit: marketwatch.com