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Overseas Stock Funds Beat US Equals in 1H17: 4 Picks

Overseas stock funds are finally making a difference for fund investors. Investors are looking to trim U.S. investments which are getting increasingly expensive. Instead, they intend to put that cash into cheaper foreign stocks, which in turn has helped foreign stock funds outdo U.S. equals in the first half.

Support from central banks also played a major role in lifting foreign stock funds. This calls for investing in such sound funds for better returns.

Overseas Stock Funds Outdo US Funds

Mutual funds focused on U.S. stocks have gained 2.7% in the second quarter, marking the fifth straight quarterly gains as corporate earnings are on a roll. U.S. stock funds were up 7.7% in the first half. However, overseas stock funds did even better, gaining 6.5% in the second quarter and 15% in the first, according to Thomson Reuters Lipper data. Cheap valuations in rest of the world and favorable central bank policies have turned the tide.

Almost $78.42 billion were invested in international stocks in the second quarter, as per Investment Company Institute data. On the other hand, $23.31 billion flowed out of U.S. stock funds in the said quarter.

Growth Funds & Technology Dominate US Stock Funds

U.S. growth equity funds outdid value offerings in the first half of the year. Large-growth category was the best performer, with mid- and small-growth not lagging behind much. Growth oriented sectors such as technology also gave handsome returns. Tech has come a long way, evolving from the dot-com catastrophe to becoming a safety trade and are now favored by active managers. Investors are pouring money into Internet and tech companies, which are less vulnerable to tax cuts and changes in interest rates. Needless to say, tech companies have also posted impressive first-quarter earnings.

Morgan Stanley Institutional Growth I MSEQX, which holds almost half of its assets in tech stocks, was up more than 27% in the first half. It topped the large-growth category and was mostly boosted by Tesla Inc TSLA, one of its top holding companies.

International Stock Funds: Broad-Based Gains

Among the international stock funds, the typical Europe stock fund returned 8.4% in the second quarter. European stocks gained mainly on improving macroeconomic and geopolitical developments as well as favorable election results in France.

The average Japan-stock funds gained 6.5% in the quarter banking on improved labor market and increase in domestic consumption. Stock funds from other areas including the typical China-region, Pacific/Asia ex-Japan and diversified Pacific/Asia funds returned 8.6%, 8.1%, and 7.3%, respectively, for the quarter.

Several prominent international stock funds also performed better than their peers during the quarter. Fidelity Emerging Markets FEMKX outperformed the diversified emerging-markets average by more than 4 percentage points. Its growth oriented strategy and increased focus on tech stocks has helped the fund register commendable returns.

Top 4 Foreign Stock Funds to Buy in the 2nd Half

Banking on such positives, investing in foreign stock funds seems judicious for now. We have, thus, chosen four funds that flaunt a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy), have positive 3-year and 5-year annualized returns and have minimum initial investments within $5000.

The question here is why should investors consider mutual funds? Reduced transaction costs and diversification of portfolios without the several commission charges that are associated with stock purchases are the primary reasons why investors should park their money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).

Fidelity Advisor Emerging Markets Income A FMKAX normally invests a large portion of its assets in securities of issuers in emerging markets and other investments that are tied economically to emerging markets. The fund’s 1-year and 5-year annualized returns are 6.9% and 5%, respectively. Its annual expense ratio of 1.13% is less than the category average of 1.15%. FMKAX has a Zacks Mutual Fund Rank #1.

Matthews China Investor MCHFX seeks to achieve its investment objective by investing a large portion of its net assets, which include borrowings for investment purposes, in the common and preferred stocks of companies located in China. The fund’s 1-year and 5-year annualized returns are 40.2% and 7.6%, respectively. Its annual expense ratio of 1.18% is less than the category average of 1.75%. MCHFX has a Zacks Mutual Fund Rank #1.

T. Rowe Price Japan PRJPX invests the majority of its net assets in companies located in Japan. It may purchase the stocks of companies of any size. The fund’s 1-year and 5-year annualized returns are 16.2% and 12.9%, respectively. Its annual expense ratio of 1.02% is below the category average of 1.33%. PRJPX has a Zacks Mutual Fund Rank #1.

T. Rowe Price European Stock PRESX seeks long-term growth of capital through investments, primarily in the common stocks of companies located in Europe. The fund’s 1-year and 5-year annualized returns are 17.4% and 9.8%, respectively. Its annual expense ratio of 0.96% is less than the category average of 1.39%. PRESX has a Zacks Mutual Fund Rank #2.

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