Quick Take: If you’re going to own only one fund that invests overseas, then the Commonwealth:New Zealand Fund (CNZLX) shouldn’t be it, says Robert Scharar, who has managed the portfolio since its inception in 1991.
Because its investments are limited to companies that are based or do at least half their business in Australia or New Zealand, the fund doesn’t provide adequate international diversification, Scharar concedes. However, he says, investors would find it a “nice addition” to a portfolio of other international stocks or funds because it can supplement those holdings.
Although it has trailed similar funds recently, the $35-million fund has consistently topped them over the long run. Commonwealth New Zealand gained 16.4% this year through August, versus 19.6% for other funds that invest in individual developed countries. For the five-year period ended last month, the fund rose an average annualized 13.8%, versus 1% for its peers. For the ten-year period it rose 3.3%, while its peers slipped 0.04%.
Scharar and Wes Yuhnke, who joined the fund as its co-manager a year ago, look for small and mid-sized companies with growing earnings and high dividend yields that they think can be sustained. They like to buy stocks at attractive valuations. In addition, the fund usually keeps 10%-15% of its assets in fixed-income securities.
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Mutual funds that invest in individual countries can add diversity to portfolios, even those that have exposure to large foreign companies, whose stocks often move in the same direction as the U.S. market, says Robert Scharar.
An advantage of the Commonwealth New Zealand fund that he runs is that, unlike similar offerings that focus on small or developing markets, the companies it buys offer transparent bookkeeping and reliable corporate governance, Scharar says.
“These are pretty good economies, and pretty good places to be” for investors, Scharar says of New Zealand and Australia, the countries the fund restricts itself to.
Both are democratic, “old line, English law-based” nations, he notes. They also have natural resources, like precious metals and timber, that are in demand abroad, as well as solid tourism industries and reasonably strong currencies. In addition, both are home to many small and mid-sized companies (which the fund focuses on) whose businesses and stock price movements are tied more to local conditions than those in the U.S. or other parts of the world, Scharar says.
Besides stocks, the fund typically keeps about 10%-15% of its assets in fixed-income securities, consisting primarily of short and medium-term corporate bonds, Scharar said. At times when stocks don’t seem compelling, or if local money market rates are alluring, Scharar and co-manager Wes Yuhnke may also maintain a cash position of 10%-15%.