Picking the winner over any short time frame is as much about luck as skill. So, we’re not going to say that Vanguard International Growth (MUTF:VWIGX – Investor, MUTF:VWILX – Admiral) is the only fund to own in 2013 … but if you have been neglecting foreign stocks in your portfolio (as we suspect you have), then this fund provides a way back into the space.
The storyline on foreign markets has been fairly negative: Europe is ailing from too much debt, and the cure of austerity — like the old practice of bloodletting — has only made the patient worse. While Greece is the poster child, other countries like Spain, with 25% unemployment, paint a stark picture of the challenges there. And the prospect of a new government in Italy has put another wrench into that country’s works. As seemingly endless rounds of elections, negotiations and summits have failed to shine a light forward, investors have steered clear.
Outside of Europe, China has contributed its share of negative headlines as investors are concerned that over-building and over-investing might have set China up for an economic hard landing. And the thinking is that as China goes, so too go other emerging-market countries.
So what are investors missing?
Europe might be opaque and in a tough spot, but European stocks actually are up about 18% this year — better than stocks in the U.S., Asia or the emerging markets. We believe the stock market is signaling that the worst-case scenario in Europe has been taken off the table. If China is able to avoid a crash landing and just muddle through, it might not take much to see investors begin to move back into a market that’s off about 5% this year and has fallen 40% or so over the last three.
Vanguard International Growth is a well-managed, conservative path back into foreign markets. Vanguard has tasked three U.K.-based firms to sub-advise the fund — Schroders, Ballie Gifford and M&G. While unfamiliar to U.S. investors, these are institutional-quality managers who have (individually and together on this fund) shown an ability to beat the broad MSCI (NYSE:MSCI) foreign-stock index and their foreign-stock-fund peers. VWIGX/VWILX provides investors exposure to stocks from all parts of the globe, including emerging markets, which make up nearly a quarter of the portfolio.
We’re not suggesting that investors pile into foreign stocks with reckless abandon, but some exposure is sensible. If a few things go right in 2013, foreign markets could build on the positive momentum that began during the second half of 2012. If not, some bad news is already priced into the markets.
Either way, there will always be opportunities on foreign shores that are not available in the U.S., and the teams managing Vanguard International Growth might find the wind at their backs in 2013.
Editor Dan Wiener and Research Director Jeffrey DeMaso publish The Independent Adviser for Vanguard Investors, a monthly newsletter that keeps abreast of recent developments at Vanguard, and the annual FFSA Independent Guide to the Vanguard Funds.