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It's a Small World After All

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Stocks in developed international markets look like a bargain these days, trading at a 13.1 times consensus estimates of 2008 earnings. By contrast, the S&P 500 is trading at about 14.2 and emerging markets are trading at about 14, according to Alec Young, international equity strategist at Standard & Poor’s.

While some investors are comfortable picking stocks for the domestic portion of their portfolios, far fewer investors have that comfort level when dealing with international equities. For this portion of their portfolios, investors are far more likely to turn to mutual funds.


The average world stock fund has a five-year average annualized return of 19.45%. Evergreen Global Opportunities (EKGAX), up 27.97%; American Funds Small-Cap World (SMCWX), up 26.76%; and Allianz RCM Global Small Cap (DGSCX), up 26.51%, are the top performers. Interestingly, all three concentrate on small-cap stocks.

The average market cap of a holding in the Evergreen Global Opportunities fund, as of September 30, was $3.1 billion. While the fund has more than one-third of its holdings in the United States, it also maintains an allocation of at least 5% to the United Kingdom, France, Japan, Germany, and Spain.

At American Funds Small Cap World fund, manager Gordon Crawford keeps 80% of the fund in companies with values below $3.5 billion. Non-U.S. equities made up some 60% of the portfolio at the end of October. Asian equities including Hong Kong’s printed circuit board maker Kingboard Chemical Holdings, South Korea’s Samsung Engineering, and South Korean’s Pusan Bank, made up 30%.

Screening for the top one-year performers generates a very different list, including Alger China U.S. Growth fund and iShares S&P Global Materials ETF. Both have enjoyed strength in their underlying regions and/or sectors in the last year, as China has put up astounding economic growth and the materials sector has continued to benefit from strong demand from emerging markets.