International funds continue to disappoint

Rising dollar and falling Europe add to 2018 losses in May, but international funds are still a good relative value

Jun 1, 2018 @ 2:22 pm

By John Waggoner

International investors' long national nightmare hasn't ended — but if you're looking for a good entry point for relatively cheap stocks, it couldn't hurt to look abroad.

For the past decade, international stocks have been a disappointment wrapped in misery. The MSCI Europe, Australasia and Far East index has lost an average 0.77% a year over the past 10 years, while the Standard and Poor's 500 has gained an average 9.14% a year.

May's performance was little help: EAFE fell 2.81% last month, bringing its total loss for the year to 3.20%. The largest international fund, Vanguard Total International Stock Index (VGTSX), fell 1.92% in May and is down 1.57% for the year, according to Morningstar Direct.

Nevertheless, May's unpleasantness may provide a good entry point for investors who have been wary of international stocks, says Jim Paulsen, chief investment strategist for the Leuthold Group.

"I like them," he said. "International stocks were market performers in 2016 and outperformed through mid-2017."

The problem this year has been the Italian debt crisis and fears of a trade war. On Tuesday, European stocks tumbled 2.7% as the Italian bond market plunged on political woes. The Standard & Poor's 500 fell 1.58% that day.

Italy isn't all that's gone wrong for international investors.

"The dollar plays a huge role in this," Mr. Paulsen said. The dollar's gains versus other currencies has deflated returns for Americans investing overseas. (Returns from international stocks to U.S. investors decline when the dollar rises, and rise when the dollar falls). The EAFE index's 2018 loss of 3.20% was just 2.27% in local currency.

"If the dollar weakens, international stocks will regain ground as fast as they lost it," Mr. Paulsen said. International stocks are far behind the U.S. in the earnings cycle and are under-owned because of their poor performance in the past decade, he said.

All of which is not to say that all international funds and ETFs have been nothing but a fiscal kidney stone this year. Funds that lean toward growth — or hedge their dollar exposure — have fared well. Here are some highlights:

• The American Funds EuroPacific Growth fund (AEPGX), the largest actively managed international fund, has gained 0.41% this year.

• Morgan Stanley Institutional International Opportunities (MIOIX) was the top international growth fund, soaring 11.19% this year and 5.35% in May.

• The WisdomTree Hedged Equity ETF (HEDJ) eked out gains by getting rid of dollar exposure. It has risen 2.02% in 2018, despite a 0.35% loss in May.

• The largest smart beta international ETF, iShares Edge MSCI Min Vol EAFE ETF (EFAV), narrowly avoided a 2018 loss, gaining 0.48%.

The losers are value funds. Sometimes cheap stocks just deserve to be cheap.

Fidelity International Value (FINVX), the largest diversified fund in the space, has shed 3% so far this year. iShares MDCI EAFE Value ETF, the largest international value ETF, fell 3.31%, albeit in a very tax-efficient and low-cost manner. The biggest loser is Federated International Dividend Strategy (FIDPX), which is down 8.12% for the year.

Naturally, there's always a bull market somewhere. The big winner: iShares MSCI Saudi Arabia (KSA), which is up 19.57% this year on higher oil prices. The biggest loser? iShares MSCI Turkey (TUR), which is down 24.88%.

Surprisingly — despite an 11.22% loss in May — the iShares Italy Capped ETF (EWI) has fallen just 1.87% this year.


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