Why International Value Funds Are All Over the Map

• By Gregg Wolper
• On 7:00 am EDT, Tuesday September 1, 2009

International value funds aren't keeping up. Or are they? If you own one of these funds, or simply watch them as an informed investor, evaluating their performance in 2009 offers more than the usual challenge.

At times, you can simply see whether growth is beating value, for example, and that's that. At such times, all value funds will lag, and among the value group, those that lean more toward blend or growth will land at the top of that category's performance chart.

Not this year. The performance gap between value and growth for foreign funds is minimal. The explanations for performance are more complicated--and therefore more interesting.

We've already explored the 2009 performances of some of these funds in recent columns. A few weeks ago I looked at Longleaf Partners International (NASDAQ:LLINX - News) to see why it was lagging this year while its similar siblings, Longleaf Partners (NASDAQ:LLPFX - News) and Longleaf Partners Small-Cap (NASDAQ:LLSCX - News), were nearly topping the charts. (The key: stark differences in performance among individual stocks.) Conversely, Bill Rocco explained in a different column why two other well-known foreign-value funds-- Dodge & Cox International Stock (NASDAQ:DODFX - News) and Oakmark International (NASDAQ:OAKIX - News)--are going like gangbusters this year.

On the Upside
One reason why the Dodge & Cox fund has rebounded so strongly this year after a poor 2008 is that the managers traditionally have invested much more of the fund's assets in emerging markets than their peers. That has had a huge impact, because even though the major markets have performed quite well in the rally this year, emerging markets have soared even higher. Check out the Russia funds topping the Europe-stock category. Even after a lousy couple of months opening the year, they now boast year-to-date gains ranging from 60% to 100% through Aug. 27. Or look at the emerging-Asia category, with its own fireworks prompting similar gains.

That helps explain why Templeton Foreign (NASDAQ:TEMFX - News) is close to the top spot in the foreign large-value chart with a year-to-date return of 39.9%. Its managers have long been partial to Asia's emerging markets, in particular. As of June 30 the fund had about 20% of assets in those countries (not including Singapore and Hong Kong, typically classified as developed markets), plus another 5% spread among other emerging markets. The average emerging-markets weighting for foreign large-cap funds is only about 10% of assets.

But emerging-markets exposure is just part of the story for the outperformers. In general, small stocks have also topped bigger ones by substantial margins during this rally. That's helped Quant Foreign Value (NASDAQ:QFVOX - News), which after two painful years is zooming in 2009. (The fund is up more than 50% for the year to date, at the very top of the foreign large-value group.) It doesn't have a noteworthy emerging-markets weighting, but it does have one of the smallest average market caps in the foreign large-value category. But even that doesn't explain everything. Also pumping up this fund's returns: its commitment to some of the most beaten-up stocks, which had hurt it badly when the economy was tumbling but which have roared back to a stunning degree. Its British homebuilders have gains that measure well into triple-digit territory. (At least two of them have zoomed more than 200% this year.)

On the Other Hand
However, many other international value funds have not enjoyed such a bounty. That group even includes a few that like to own some smaller stocks. For First Eagle Overseas (NASDAQ:SGOVX - News), whose 13.6% year-to-date gain lags more than 90% of the foreign small/mid-value category, the explanation lies in caution. Riskier stocks have outperformed, and this fund didn't achieve its stellar long-term record by delving into dicey companies, preferring those with a substantial margin of safety. Moreover, it doesn't have a big stake in emerging-markets companies. And with capital preservation a key goal, it devotes more money to cash (more than 8% at the end of July) and gold-related holdings (12%) than most peers. All of these traits have held it back, in relative terms, after the first two months of 2009--just as they helped the fund stay ahead of nearly all competitors during the bear market.

The same combination of factors explains the laggard showing of IVA International (NASDAQ:IVIOX - News). That's not surprising, for this fund is managed by First Eagle alumni. IVA International, too, has money socked away in gold; had an even bigger cash stake at the end of July (20% of assets) than the First Eagle fund; and had an even smaller emerging-markets position. So it's not shocking that its 13.5% year-to-date gain also sits near the bottom of the foreign small/mid-value group.

Another value laggard, Mutual European (NASDAQ:MEURX - News), was also held back early in the rally by a cash position, as well as a put option on a European index (that is, a bet that the index would fall). Those positions didn't last too long, though, so other reasons must be found to explain why that fund's year-to-date return lands in the Europe-stock category's bottom decile and trails the MSCI Europe Index by a wide margin. Here, as with some of the others, specific stock selection bears some blame: Its preference for conservative plays on sound financial footing was out of step with broader trends in this rally. And there's another factor here: Mutual European hedges most of its foreign-currency exposure into the U.S. dollar. With the greenback having given up ground in 2009, that hasn't helped returns versus category rivals, most of which don't follow that policy. And the index is unhedged.

It's worth noting, though, that Mutual European, like First Eagle Overseas, topped its peers by substantial margins when markets were plunging in the past couple of years.

Long-Term Outlook
The bright side for shareholders of the underperformers is that all are following the policies you'd expect them to follow. They aren't faltering because of abrupt switches of approach. If you liked their strategies before, you can rest assured that they are still adhering to them.

The same goes for this year's foreign-value winners. They haven't soared because they decided to chase hot areas that they've never before noticed. Rather, parts of their time-tested strategies have happened to be strongly in favor for about half a year now.

In fact, it's worth noting that all of these funds share that admirable trait. These offerings have long-term approaches that actually stay in place for the long term.

Gregg Wolper has a position in the following securities mentioned above: SGOVX

Buzz up!