3 international funds to depend on

By Morningstar

Several months ago, Morningstar looked at three outstanding domestic-stock fund managers (click here for the article; registration required) who had a rough go of it in 2006 but whose offerings remain an attractive proposition for investors. Today we'll do the same with international funds.

Foreign stock markets generally had another blockbuster year in 2006, outperforming U.S. shares for the fifth year in a row. A declining dollar, which amplified international returns, has a lot to do with that. But even in local currency terms, overseas stocks often left homegrown names in the dust. But that trend was far from universal or homogenous: Emerging markets, despite a massive setback in May, once again outpaced developed countries. Lower-quality, highly cyclical stocks fared far better than more stable and defensive names as risk appetites ran higher and higher.

In that kind of environment, numerous skilled and experienced foreign stock-fund managers trailed the market. What's important is why they did, if there were any fundamental changes in strategy or other watershed events at the fund or company. Today, we'll take a closer look at three such laggards that we think continue to be superior offerings, as their proven long-term concepts and people remain in place and their outlook for future success is positive.

UMB Scout International

James L. Moffett, a manager working for the asset-management subsidiary of a midsize bank in Kansas City, Mo., might not exude much cosmopolitan flair. Yet Moffett, who is based in Milwaukee and has led UMB Scout International (UMBWX) since its inception in 1993, has proved that one doesn't need analyst teams positioned around the globe in order to run a rock-solid core holding such as this. It helps, of course, that he focuses on blue-chip names from developed countries, for which extensive research is easily accessible.

Despite this conservative profile, he has outperformed many much bolder options in the long term. Indirect exposure to fast-growing segments of the global economy has helped, as illustrated by winning picks such as Austria's Erste bank, which has a strong position in Eastern Europe.

But last year, the fund's return of a whopping 21.5% meant trailing 85% of its peers in the foreign large-blend category. Moffett doesn't worry much about short-term performance, though, as illustrated by his patient approach and low portfolio turnover. We don't think shareholders should, either. The fund is well positioned to withstand the potential storms ahead, of which the markets' tumble in recent weeks has given us a glimpse.

MainStay ICAP International I

We made Rob Lyon, MainStay ICAP International's (ICEUX) skipper, Morningstar's International Fund Manager of the Year in 2005, and the fund promptly fell short of what its typical rival in the foreign large-value category achieved in 2006. But a shortfall of 1.6 percentage points is certainly sufferable, given that its absolute return for the year was 24.3%. And rather than being a result of Lyon making fundamental changes or bad bets, this minor setback is a reflection of the manager staying true to his successful long-term strategy of building a concentrated portfolio of mainly mega-cap stocks.

There are some worries, though. Co-manager Matt Pickering left to join Oakmark, and ICAP was acquired by New York Life, thus losing its independence. And Lyon's decision to open the formerly Europe-focused fund to investments in Japan hurt last year, as the Japanese market was rattled by scandals and a rising yen. Still, since Lyon was able to hold on to his team of experienced analysts, we believe the odds are favorable that he will continue to deliver solid long-term returns at muted volatility.

Masters' Select International

Despite finishing 2006 slightly below par for the foreign large-blend category, after also having done so in 2004, Masters' Select International (MSILX), a closed offering, is a solid long-term holding. That's because not one but five skilled and proven investors each run a portion of this multimanager fund: Oakmark International's (OAKIX) David Herro; Ted Tyson, formerly of American Century; Bill Fries of Thornburg International Value (TGVAX); Jim Gendelman of Marsico International Opportunities (MIOFX); Amit Wadhwaney of Third Avenue International Value (TAVIX, news, msgs); and Doug Allen from institutional boutique Mastholm.

The end result isn't -- as one might suspect -- a bloated portfolio resembling the benchmark but rather a distinctive amalgam of these very active manager's best ideas. Alas, they made several costly mistakes in 2006, such as holding on to struggling Canadian paper company Abitibi-Consolidated (ABY, news, msgs) for too long.

Given the extended period of strong returns and the increasing signs that ambitious valuation levels make international stock markets vulnerable to significant setbacks, we wouldn't necessarily advocate investing heavily in these or any foreign stock funds at this juncture. But each of them deserves to retain its place within a well-diversified portfolio.

This article was reported and written by Kai Weicking for Morningstar.