Actively-managed vs. passive international stock funds

Mutual funds

Each week’s issue of Barron’s usually includes an interview with a fund manager or expert toward the end of the issue. Last week’s issue (dated September 18, 2006) featured an interview with Rudolph-Riad Younes (subscription required), co-manager of the Julius Baer International Equity Fund (symbol: BJBIX for Class A shares).

I’ve been interested in a while now in putting more money in investments outside the US market, so I read the article with a great deal of interest. Mr. Younes doesn’t seem to suffer from the rah-rah-there’s-money-to-be-made-here-there-everywhere kind of attitude that you sometimes find in interviews with fund managers.

His point of view appears grounded and he states some commonly held beliefs about the state of the current US economy, including that China and Asia are allowing the rest of the world “very low credit and very low interest rates”, that inflation should include housing and energy, that wage inflation isn’t here because people are “[using] their houses as ATMs”. All pretty standard stuff, but surprisingly not comments you hear nearly as often on typical talk US talk shows like CNN and CNBC.

His fund has performed well, and so I wanted to find out which stocks he recommended. They are the following:

Company Ticker Recent Price
Richemont CFR.Zurich Chf59.9
State Bank of India SBIN.Mumbai Inr976.5
HK Ruokatalo HKRAV.Helsinki Euro 10.44
Commerzbank CBK.Frankfurt Euro 27.23
Impact IMP.Bucharest Rol0.47

Hmm. Can you guess what my reaction was?

Here’s my difficulty, as an individual investor in the US. The stocks Mr. Younes recommended are not at all accessible to me for either investment or research purposes. Sometimes, bigger, more well-known stocks like Toyota (symbol: TM) are available in the form of , but these are a minority. (For those curious, Richemont is a Swiss luxury goods company, probably best known for its Cartier brand; State Bank of India is self-explanatory; HK Ruokatalo is a Finnish meat processor; Commerzbank is the second-largest corporate bank in Germany; Impact is a construction and development company in Romania, whose real estate market prospects are favored by Mr. Baer.) In this case, it seemed that the Barron’s interview was more akin to an advertisement for the Julius Baer fund.

I must be demanding too much. After all, it’s probably unrealistic to expect that even in this day and age, people anywhere should be able to invest wherever they please. The next best thing might be then to own either ETFs or mutual funds in the particular international category I’m interested in. If so, then maybe the interview and “ad” aren’t so bad if they inform me of a product that fits my needs.

Well, I looked up Julius Baer International Equity Fund – Class A (BJBIX) and discovered that it’s closed to new investors. Bummer.

But at least it and a few others are no-load, no-fee funds at Schwab (my brokerage firm). I noticed that there was another fund entitled “Julius Baer International Equity Fund II – Class A” (JETAX) with an inception date of May 2005 that looked awfully similar to BJBIX. In fact, 8 out of their top 10 holdings are the same, though in a slightly different order. The performance-to-date of the two funds are also very similar.

After reading the prospectus to note any differences, I decided to compare these funds’ performances to other emerging-market funds that I’ve been following. The difficulty in selecting an international stock fund is that they can be sliced and diced so many ways: value, growth, blend, large, small, mid, region (Asia, Europe, Japan), etc. It makes comparing them very difficult, not to mention the fact that it’s extremely difficult to look at how the underlying holdings have fared.

In short, comparing funds and choosing from among them is a labor-intensive task. Expense ratios for these funds also tend to be higher, between 1.3-2% from what I’ve seen. Here are just a few funds that I’ve been following (a tiny subset of all the available 5-star international funds out there), though I currently don’t own any shares in any of them except the ETF EEM:

Name Ticker Region Expense Ratio 3-year avg. annual return Top 5 Holdings
Julius Baer Int’l Equity Fund II JETAX Non-US 1.32% N/A – 27.84% for one year Powszechna Kasa Oszczednosci Bk Polski
Komercni banka
Vodafone Grp
US Global Investors Eastern Europe EUROX Eastern Europe 2.00% 44.76% Lukoil ADR
Haci Omer Sabanci Holding
Gazprom OAO
Turkiye Garanti Bankasi
OTP Bank
Janus Overseas JAOSX Non-US 0.90% 32.81% Reliance Inds
Potash Corp./Saskatchewan
Samsung Electronics
Li & Fung Ltd
The Tata Iron & Steel
iShares MSCI Emerging Markets Fund EEM Non-US 0.77% 29.1% (as of September 2006) Samsung Electronics
Taiwan Semiconductor
Kookmin BK ADS

In many ways, investing internationally just doesn’t give you the transparency and visibility available when investing in common US stocks. Depending on the fund, you may be relying on faith that the management fees you do pay are worthwhile, meaning the fund manager really can pick investments with better returns overseas than a passive fund or ETF.

I’ve heard that actively-managed emerging-markets funds outperform indices, but a recent article last week . Julius Baer’s two funds are also mentioned in this article as active funds that handily beat out their passive counterparts. But, the index against which it’s measured (MSCI EAFE, which has a passive ETF option in the form of EFA) might not be the most appropriate. Might not EEM or some other emerging-market index be a better proxy?

I’m still looking for an international stock fund but it seems I’ll have to do some more investigating before choosing one or two to put my money in. Any readers out there have thoughts to share?


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