3 global funds for uncertain times

By Morningstar

Most U.S. investors and advisers still cling to the long-held view that foreign stocks -- and, therefore, mutual funds -- are inherently more risky than their domestic equivalents. That blanket statement was never true, and I've tried to dispel that myth in another Fund Spy. But even if an investor does agree that global funds, which invest overseas as well as in this country, make a lot of sense to hold as a core investment, he or she should still look for a fund with a palatable risk profile.

That message is a timely one. After all, many signs, foremost the rapidly deteriorating housing market, point to a slowing economy in the United States. With many stocks still trading on the assumption of a fairy-tale scenario continuing ad infinitum, the potential for disappointment is high. And the rest of the world would almost assuredly be dragged down along with the United States, as export-driven growth in Asia and Europe would be adversely affected, too. Therefore, it's as good a time as any to hunt for resilient options among the many solid choices in the world-stock category.

Volatility, as measured by standard deviation, is among the most commonly used metrics for assessing risk. Simply put, standard deviation measures the amplitude of a fund's price swings over a given time period. In addition to standard deviation, which takes into account a fund's upward and downward performance swings, investors will also want to focus on a fund's potential for losses.

In order to zero in on funds that deliver relatively predictable returns and held up strongly in the most recent bear market, March 2000 through October 2002, I've filtered the world-stock category for options that sport moderate expenses, are available to retail investors for less than $100,000, have posted below-average volatility and held up better than their rivals in down markets.

Of the 80 funds in the world-stock category with a history reaching back beyond the year 2000, 30 had an expense ratio below 1.3% (the upper end of what we'd consider low cost) and fulfilled the minimum investment criterion, too. Of those, only eight funds managed to keep their cumulative losses during the aforementioned bear-market period below 20%. And a further four offerings failed the volatility hurdle, as their average standard deviation (the most common measure for the consistency of returns) for the trailing five years through Aug. 31, 2006 came in above 14, the typical standard deviation for this group. Van Kampen Global Franchise (VGFAX), one of our favorite low-risk options, is closed to new investors and was thus the last fund to be cut from the list. We'd happily recommend buying it if it reopened, though.

This exercise thus left us with three intriguing, very distinct choices:

American Funds Capital World Growth & Income

Long a steady fund, American Funds Capital World Growth & Income's (CWGIX) focus on large companies with attractive dividend yields, coupled with its usually significant cash stake and rock-bottom expenses, has awarded shareholders with consistently peer-beating returns at very low volatility.

In fact, the exceptionally exuberant market of 1999 was the last time this fund trailed its category rivals. Even several years of strong inflows, which have inflated the fund's assets to more than $70 billion, have not slowed this fund down, as adviser Capital Research's multi-manager system has been able to absorb the tide without sacrificing performance thus far.

Very low costs are another factor in this offering's favor. But even American Funds don't have access to an infinite pool of outstanding managers, so investors should manage their expectations going forward; despite its unmatched talent pool and retention skills, American Funds will eventually have to add less experienced managers to the roster if assets continue to flow in.

Mutual Discovery

Mutual Discovery (MDISX) built its track record and reputation largely under the stewardship of value whizzes Michael Price and David Winters. Price departed nearly a decade ago, and Winters has since left to start his own mutual fund company. But his former assistant David Segal, helped by Anne Gudefin, has thus far been able to fill his shoes without skipping a beat.

Just like Winters did, the pair hunt for deeply undervalued stocks, and they don't care much where they find them. Their hunting grounds include special situations such as bankruptcies, merger arbitrage and private financings. That may sound risky, but the managers focus on securities that offer a high margin of safety. Cash stakes add a buffer here, too.

Templeton Growth

Unlike the aforementioned funds, Templeton Growth (TEPLX) doesn't usually let large cash stakes accumulate, but you'll sometimes find bonds in the portfolio. During the bear market of 2000-02, for instance, a position in German treasuries was the largest holding, helping the fund hold its value amid the stock market turmoil.

Stoic Scot Murdo Murchison, only the third manager of this fund since its 1954 inception, doesn't worry much about short-term performance or market noise. He patiently holds his value stocks until they come in line with his estimate of fair value. That can take a long time, and his large media stake has yet to pay off. But even if a few bets don't ultimately pan out, there are enough other solid ideas in this well-diversified portfolio to make it a viable core investment.

As you can see, the world-stock category offers quite a few interesting choices for those investors who want one-stop exposure to global stock markets with limited risk. Combine any of these funds with a prudent domestic-bond option, such as Payden Core Bond (PYCBX), and a solid world-bond option, such as American Century International Bond (BEGBX), and you arguably end up with an all-weather portfolio consisting of just three funds.

By Kai Wiecking