Evaluating the Different World-Stock Formats

Each option, including owning no world-stock funds at all, has its pros and cons.

Gregg Wolper 29.10.2012
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Last month, I wrote about the three noteworthy world-stock funds offered by a single moderately sized shop, Artisan. The column focused specifically on that trio of funds, it did not go into detail about the distinctions between the two main camps of world-stock funds in general or how investors should approach global investing in light of that divide. Anyone interested in this area, though, should consider those issues before selecting a fund.

Don’t Worry, I've Got This

One way to run a world-stock fund is to hand control of the entire portfolio to a single manager or team. By making no distinction between stock selection in the United States and abroad, this method allows the manager to compare like with like across borders, choosing the best options in all cases. Such funds tend not to assign specific target allocations for U.S. and foreign stocks. Some investors would applaud the freedom that this strategy affords managers, saying this is why they own a global fund in the first place.

The key benefit of this approach is that it avoids establishing what could be artificial boundaries between companies that, in many cases, are chasing the same customers and getting their revenue from the same countries. In addition, adopting this format means that a fund company doesn't have to find multiple talented managers to run a single fund.

The disadvantage, however, is that attempting to evaluate companies throughout the entire world is a daunting task. The most obvious challenge is the number involved; there are simply so many more companies to assess when managers take on a global mandate rather than focusing on just the U.S. or the international realm. (That's true even if, in reality, they aren't looking at every single stock that exists.) Moreover, such managers must master the variables involved in assessing companies in different locales. Legal, accounting, and political distinctions can have important effects on the prices and prospects of what appear to be similar companies located in different countries.

One fund that takes this approach is Wintergreen (WGRNX). David Winters runs the whole portfolio, looking all over the world to assemble a compact portfolio of the securities he likes best without trying to maintain specific foreign versus U.S. allocations. Although it's had a weak showing this year, this fund generally has managed to overcome its challenges (and an outsized expense ratio) and outperform since its 2005 inception. 

You Stay on Your Side, I'll Stay on Mine

The second approach to world-stock investing is to divide the fund between two managers or two teams. One tackles the U.S. picks while the other handles international duties. These funds often do stick to fairly static target allocations for the two sides, so the different teams, in theory, don't even have to communicate. They just fill up their sleeves while an overall manager from the advisor takes care of the practical task of rebalancing back to the targets when one side outperforms the other.

A variation on this approach is for the two sides to have more flexible targets and to communicate with one another or with the overseer to decide whose stocks seem more appealing at a particular time. Based on those discussions, one side can get a higher allocation than usual at that juncture.

Source: Morningstar Direct; Data as of 10/01/2009 to 9/30/2012.

The advantage of dividing the duties between different managers is that it allows specialists who have proved their abilities on funds targeting their areas of expertise to focus on those areas alone. A disadvantage, if the allocation is static, is that these specialists will fill up their allotted sleeves even if their regions happen to have far fewer attractive opportunities at a certain time. Another drawback is that certain firms may have a great manager available to take care of one side, but don't necessarily have the same level of talent on the other.

Two funds that use this separate approach, and which generally manage to overcome the inherent obstacles, come from Oakmark. At Oakmark Global Select (OAKWX), David Herro picks the foreign stocks and Bill Nygren handles the domestic duties. They generally split the portfolio roughly in half, but they have the flexibility to take that as far as 70/30 in either direction if they feel it's warranted. At Oakmark Global (OAKGX), Clyde McGregor handles the domestic side while Rob Taylor takes responsibility for the international picks.


All in all, there's no "right" approach to global-equity investing. As the examples above show, investors can succeed by taking several different paths. (And of course, each approach also features plenty of mediocre funds not worth an investment.) The most important thing is to understand the different options available. By knowing the ins and outs of the various world-stock management formats, investors will be better prepared to fully investigate the choices available and will be more likely to make a decision that is most appropriate for them. 

Gregg Wolper is an
Editorial Director and Senior Mutual Fund Analyst at Morningstar.

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Gregg Wolper  Gregg Wolper is an editorial director and senior mutual-fund analyst at Morningstar.

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