American investors keep pouring money into the international markets as everyone from portfolio managers to pundits advises them to go global. But in their rush to diversify, investors need to slow down long enough to study the funds that will maximize portfolio returns while reducing risk.
In that spirit, Standard & Poor’s Equity Analyst Michael Souers recently set off to identify the international equity funds with some of the most unfavorable characteristics for investors. Narrowing his search on S&P’s MarketScope Advisor, Souers pinpointed three funds that are “major offenders” in terms of carrying high expense ratios while delivering disappointing performance.
“Factors that we think investors need to be mindful of include investing in funds that carry sales loads, those with poor historical relative performance record, and funds with comparably low Sharpe ratios and/or high standard deviations,” Souers wrote in a Jan. 30 “Trends & Ideas” report.
The Sharpe ratio is used to quantify how well an asset compensates the investor for any level of risk taken. The higher the Sharpe ratio, the better. Meanwhile, the standard deviation measures historical volatility. The lower the standard deviation, the better.
To narrow his search, Souers looked specifically for S&P one- and two-star ranked international equity funds with net assets of $20 million or more. In addition, he screened for funds that ranked in the bottom half of international equity funds for both one year and three years. Finally, he identified funds with a net expense ratio above 1.5%, a Sharpe ratio below 0.25 and a standard deviation above 23.0–all metrics that are much worse than peers.
The three funds listed here have the unfortunate distinction of meeting all of S&P’s screening criteria.
Read about the Top 5 International Bond Funds at AdvisorOne.
This S&P two-star-rated equity fund has underperformed its large-cap value peer group over the past one-, three-, five- and 10-year periods ended Jan. 27, with a greater than 500 basis point underperformance over the five-year period (-10.4% versus -5.3%).
S&P negatively assesses the fund’s net expense ratio of 2.1%, well above peers at 1.3%. Moreover, ABICX’s Sharpe ratio of 0.23 versus 0.34 for peers reflects a lower risk-adjusted return in the fund’s portfolio, and the fund’s higher standard deviation of 26.74 versus 24.24 suggests greater volatility.
Companies within the portfolio that have relatively weak earnings and dividend growth include E.On and Vodafone. “ABICX’s dividend yield of 4.0% also falls well shy of peers (5.2%), and we view yield as a key component to investment returns during periods of uncertainty,” writes S&P Equity Analyst Souers.