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3 Funds That Aim to Offer the World

This week, the world’s most powerful leaders — the Group of Eight — met in Italy to discuss how to handle the global recession. Meanwhile, oil prices plunged, ousted Honduran president Manuel Zelaya tried to regain power of his country and violent protests broke out in China.

Those events aren’t the only reasons why the international scene is getting its fair share of the spotlight. Indeed, just as attention-grabbing: fund performance. According to Lipper, the average domestic equity fund gained 6.5% in the first half of 2009; while the typical world equity offering gained 14.7%. Those returns have convinced investors that it may be time to once again send their money to overseas markets in Europe and Asia.

Investors who managed to more than double their returns by investing in an international fund instead of a domestic one were either prescient or just plain lucky. Usually, it comes down to a little of the former and a lot of the latter. But that’s a pretty big gamble to make. That’s why the mutual fund industry cooked up something called global funds. These offerings invest both in the U.S. and in countries outside its borders. The idea is simple: Give investors a one-stop option that buys stock tickers throughout the world’s exchanges. Investors can then sit back and relax instead of making what could turn out to be a poorly-timed investing decision on, say, Japanese retailers or European banks.

Our fund screen tool lists 2,128 global/international funds. (We’ll get to the problem with the labeling of these funds in a minute.) We trimmed that group down to 274 by disqualifying funds that charge a sales load. We then looked for funds with top-tier performance track records during the trailing three- and five-year time periods. The funds also had to charge below-average fees. We were ultimately left with just three funds.

In order to arrive at that final list we had to do a little subjective tweaking. This is where the labeling problem comes in. Tim Courtney, the chief investment officer at Oklahoma City-based Burns Advisory Group, defines global funds as those having around 40% of their assets invested in the U.S. That’s a definition that jibes with our thinking and with other experts, as well. But our fund screen tool lumps together global funds that fit our standard with international ones that could allocate much more of their money overseas. To make sure the funds fit that 40% parameter, we personally sifted through them. Anything less than 20% and greater than 50% was knocked out of contention.

Global funds offer investors an easy way to get instant portfolio diversification. And, for beginning investors, or those with smaller account balances, they’re also a cheaper alternative to buying several international and domestic funds. “We will use some global funds as an easy way to get access to broad diversification on smaller balances when we don’t want to go and buy several funds,” says Courtney.

However, some advisors point to the last year and argue that investors need to be more proactive with their retirement accounts instead of relying on a product that is wrapped up neatly for them. These advisors like to actively manage their domestic and international exposure, in order to avoid areas that may be cooling off while taking advantage of others that are heating up.

That point is illustrated in the returns of global funds during the first half of 2009. The average U.S. large-cap fund returned 5.6%, according to Lipper, while the typical international large-cap fund — those that only invest outside the U.S. — gained 7.1%. Meanwhile, global large-cap funds that invest in the U.S. and abroad finished right in the middle of those two groups, gaining an average 6.8%. That middling performance is why some advisors prefer to pick and choose their funds.

Whenever we arrive at a list that has such few candidates we feel compelled to explain where all the competition went. Polaris Global Value (PGVFX) and T. Rowe Price Global stock ticker (PRGSX) didn’t have good enough performance track records at the time. Dodge & Cox Global stock ticker (DODWX) and Thornburg Global Opportunities (THOAX) haven’t reached their fifth birthdays, so they don’t have long enough histories for inclusion. (The Thornburg fund also charges a sales load.)

One that made it through, Oakmark Global (OAKGX), is a fund that has made our list before. According to Morningstar, the fund has 39% of its assets in North America, 38% in Europe and Britain and 17% in Japan, with the rest spread throughout areas like Latin America. Top holdings include Oracle (ORCL), Credit Suisse (CS), Bulgari and Intel (INTC). The fund has returned an average annual 2% the last five years, about a half percentage point ahead of a Morningstar global index.

The Criteria: The funds on this week’s list are classified as global/international by Lipper. We narrowed down our candidates by looking for those with performance track records during the trailing three- and five-year time periods that put them in the top 50% of their peer group. The funds had to be open to new investors, charge an annual expense ratio under 1.5% and require a minimum investment less than $5,000. Furthermore, the funds had to have around 40% of their assets invested in the U.S. in order to fit our definition of a global fund. As usual, we did not include load funds.

Globe Trotters
Ticker Fund Assets Year-to-Date Return (%) 3-Year Average Annual Return (%) 5-Year Average Annual Return (%) Expense Ratio
Source: Lipper
Note: Data as of July 9, 2009
FWWFX Fidelity Worldwide 906 0.6 -7.0 1.21 1.21
OAKGX Oakmark Global 1384 6.5 -6.8 2.00 1.16
USAWX USAA World Growth 363 2.3 -5.7 2.10 1.24

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