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Fund Spy
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4 funds to own when the dollar falls
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These great funds rarely hedge their currency exposure, so if the dollar keeps falling, these should work out just fine.
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By Russel Kinnel
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Picking a good foreign fund takes a little effort. When you're analyzing a fund's record, you have to take a lot of factors into account.
First, there's style. You want to be sure the fund has performed well relative to funds with similar investment styles. Second, there's currency policy. Some funds rarely hedge their currency exposure. That means they profit from a falling dollar. Others are always hedged so that currency movements won't affect their total returns -- though it will affect their relative performance. And some funds don't fall in either camp because they hedge occasionally.
One way to make this process easier is to own two foreign funds instead of one. With two funds you can cover a lot of the style box and you can have one fund that is hedged and one that's unhedged. If you bought a foreign-stock or international-bond fund in recent years and performance was a big factor in your decision, chances are you picked one that was either value-biased, hedged, or both. So, today I'll look at some of the more attractive unhedged funds. If the dollar keeps falling, these funds should work out just fine. If you already own a overseas stock or bond fund, be sure to check its currency policy first before buying a second fund.
One caveat: While being on the right side of the dollar's direction gives you a tailwind, a foreign fund will never work as a pure play on a currency. Owning a hedged foreign fund certainly didn't make anyone rich during the bear market. In addition, a falling dollar will hurt some overseas companies that do a lot of business exporting products to the U.S.
Harbor International (HAINX)
This fund uses a patient value-oriented style to beat the competition. Manager Hakan Castegren looks for companies with established market positions, but whose shares are trading at a discount. While that sounds fairly similar to a large number of foreign funds, the way Categren applies it isn't. He unearths some unusual holdings and tends to concentrate assets in just a few industries. A few years ago, Castegren even made Russian oil company Lukoil a top holding. The results aren't typical, either. Only one fund has a better 10-year record. If you can't get into the institutional shares, the retail shares of Harbor International (HRINX) are available for a $2,500 investment through most mutual fund supermarkets.
Fidelity Diversified International (FDIVX)
As you might expect from a fund with diversified in the name, this fund delivers a fairly smooth ride by investing in a wide range of stocks. Since taking the reins in 2001, manager Bill Bower has beaten his peers by staying cautious on valuations and making good stock picks.
T. Rowe Price International Bond (RPIBX)
Stock funds aren't the only way to get exposure to foreign currencies -- you can do it with an international-bond fund, too. Just don't get carried away and make it a big part of your portfolio. Lead manager Ian Kelson seeks to tone down the risks in investing in foreign debt by sticking with mostly high-rated bonds. Even so, this fund still bounces around a fair amount in response to currency shifts.
Vanguard European Stock Index (VEURX)
This is a good way to get low-cost exposure to European stocks and currencies. The fund tracks an unhedged index of European stocks, and with an expense ratio of just 0.30%, it's far cheaper than most Europe-stock funds -- or any other international-fund group for that matter. Its 10-year returns are just barely below the top third of Europe-stock funds, and that's about what you usually get from a good low-cost index fund.
(c) Copyright 2003. Morningstar, Inc. All rights reserved.
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