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Morningstar FundInvestor
May
2015
World-stock funds with relatively hefty stakes in
foreign equities have generally fared worse during
the past year than those with relatively light stakes
because international equities have lagged far
behind domestic ones in U.S. dollar terms. The
MSCI
All Country World Index ex
USA
has returned just
7
.
5%
in dollar terms during the
12
months through
April
30
,
2015
, in fact, while the
MSCI USA
Index
has gained
12
.
5%
.
This disparity in returns has more to do with currency
performance than with stock market results. Foreign
equities have actually outpaced U.S. stocks during
the past year. (The
MSCI
All Country World Index ex
USA
has gained
14
.
7%
in local terms during the
12
months through April
30
.) But the U.S. dollar has
appreciated versus the euro, pound, yen, and many
other currencies during the past year, and most world-
stock funds do not hedge their foreign-currency
exposure. (U.S. funds that do not hedge their foreign-
currency exposure have to translate the returns of
their overseas stocks back into the dollar, while those
that fully hedge do not and get the local returns of
their international holdings.)
Many experts think that the U.S. dollar will continue
to appreciate versus many foreign currencies in
the shorter term, largely because the Federal Reserve
intends to raise interest rates in
2015
, while the
European Central Bank and the Bank of Japan are
expected to maintain loose monetary policies in
ongoing efforts to stimulate growth.
If the U.S. dollar does continue to appreciate—or if
U.S. stocks perform much better than their overseas
counterparts—a handful of world-stock funds will
remain at a marked disadvantage versus their peers,
including
Tweedy, Browne Worldwide High
Dividend Yield Value
TBHDX
. This fund does not do
any currency hedging. What’s more, partly because
overseas companies tend to have higher payout ratios
and yields than domestic firms, this fund regularly
has a relatively hefty foreign stake and currently has
19
percentage points more than the world-stock
average of
49%
in international stocks. As a result,
this fund has lagged
94%
of its peers and returned
7
.
0
percentage points less than the group norm of
6
.
5%
during the
12
months through April
30
.
Tweedy, Browne Worldwide High Dividend Yield
Value has long-term appeal: Its strategy is sound;
its management team is seasoned and skilled;
and its overall record is strong. But it will face a
severe headwind as long as foreign stocks signifi-
cantly underperform U.S. equities in dollar terms.
Meanwhile, if the U.S. dollar depreciates—or if U.S.
stocks fare worse than their overseas counterparts
do—a number of world-stock funds will be at a major
disadvantage versus their rivals, including
Janus
Global Research
JAWWX
. This fund does not
hedge its foreign-currency exposure, either. But this
fund, which is overseen by the firm’s director of
research while its analyst team picks the stocks, has
6
percentage points more than the world-stock
average of
51%
in U.S. equities, as the team has
found significantly more names at home than abroad
that meet its growth and other criteria. And thanks
to that overweighting in U.S. equities, plus the quality
of the team’s stock selection in the health-care
sector, this fund has outpaced
94%
of its peers and
returned
6
.
7
percentage points more than the group
norm of
6
.
5%
during the
12
months through April
30
.
Janus Global Research also has the quality of its
analyst team, a good long-term record, and an
attractive expense ratio in its favor. However, its
unhedged currency stance and oversized U.S.
stake will be burdens if foreign currencies or foreign
stocks outperform.
K
Contact Bill Rocco at
bill.rocco@morningstar.comGlobal Funds That Lean Heavily
Toward the USA
Red Flags
|
Bill Rocco
What is Red Flags?
Red Flags is designed to alert
you to funds’ hidden risks. Such
risks can take many forms,
including asset bloat, the
departure of a solid manager, or
a focus on an overhyped asset
class. Not every fund featured
in Red Flags is a sell, and in fact,
some are good long-term
holdings. But investors should
be prepared for a potentially
bumpier ride in the near future.