When investing in global mutual funds, the results can sometimes be confusing.  Often this is because portfolio managers need to buy currency in the country they are investing in when buying global mutual funds.  In other words, if the value of the fund increases versus the dollar, this will help to boost returns – and vice versa.  It’s actually possible for a foreign fund to rise in value even though the portfolio holdings fall!  Yes, this is the power of currency fluctuations and global mutual funds.

To deal with the volatility, many global mutual funds will hedge their portfolios.  This means using sophisticated investments – like options and futures – to mute the currency movements.

Given this mutual funds information, is this a good thing?  Keep in mind that it can increase costs as well as be difficult to manage.  At the same time, when investing in foreign markets, it is usually a good idea to get currency exposure because it is a good source of diversification.  After all, is it really a good idea to have all your assets in the U.S. dollar – especially if there may be a rise in inflation?

So to get a better understanding of things, let’s take a look at some of the top global mutual funds according to mutual funds research:

Artisan International Value Investor (ARTKX)

Artisan International Value (MUTF: ARTKX), which has $3.3 billion in assets, focuses mostly on small-and-mid cap companies.  There is also a search for those investments that are selling at cheap levels.  While the fund does use currency hedging, it is a small amount. All in all, the strategy is working quite well.  Over the past five years, the average annual return was 7.04%. Currently, Artisan’s portfolio has only securities in developed countries, like Europe and Japan.  In fact, about 20.5% is in the U.S. As a large amount of assets come into the Artisan fund, there’s a good chance it will close its doors to new investors.  The reason is that it gets more difficult to put money to work.

Oakmark International I (OAKIX)

In the foreign investing space, David Herro is one of the best.  He manages the Oakmark International I (MUTF: OAKIX) fund, which has generated an average annual return of 9.29% over the past ten years. Even on a short-term basis, Oakmark has been a strong performer.  Consider that it is up 6.29% this year already. Herro has an eclectic style, which involves buying value and growth companies as well as small and big caps.  He also will be flexible with currency hedging, depending on the risk levels. Hey, he just wants to find any way to make money.

Oppenheimer International Growth A (OIGAX)

Oppenheimer International Growth (MUTF: OIGAX) has about 15% of its assets in emerging markets, which certainly helps to boost returns.  And yes, it means there is more risk.  But the portfolio manager, George Evans, knows how to navigate through the volatility. Then again, he has a focus on the long-term and tends to buy larger companies.  The top holdings include Autonomy Corporation (PINK: AUTNF), Nidec Corporation (NYSE: NJ), Ericsson (NASDAQ: ERIC) and Capita Group PLC (PINK: CTAGY). Evans actually has his own investment technique called MANTRA.  This stands for mass affluence, new technology, restructuring and aging.  No doubt, these are megatrends where investors can make a tidy sum. What about currency hedging?  Evans rarely uses it.

Fidelity New Markets Income (FNMIX)

Fidelity New Markets Income (MUTF: FNMIX), which has $3.8 billion in assets, focuses on emerging market bonds.  True, this is a risky area – but the returns can be stunning.  Over the past decade, the fund has clocked an annual average return of 11.38%. The Fidelity New Markets Income fund dials down its risk levels by buying dollar-denominated bonds, so as to wash out currency exposure.  There is also a strong discipline with finding good values and avoiding overheated markets.

Harding Loevner Emerging Markets (HLEMX)

As the name implies, the Harding Loevner Emerging Markets (MUTF: HLEMX) global fund invests primarily in stocks that are in the emerging markets (about three-quarters of the portfolio).  The manager, Rusty Johnson, looks for growth companies but tries to avoid risky sectors.  The top holdings include Vale S.A. (NYSE: VALE), America Movil (NYSE: AMX) Samsung Electronics, Petroleo Brasileiro (NYSE: PBR) and Delta Electronics. Johnson has managed the fund since 1998.  Before this, he had a stint of about ten years investing in Asia. And the experience has been a big help.  The ten year average annual return on the Harding Loevner fund is 14.61%.