The Value Line Mutual Fund Survey

Short-List Picks: Foreign Stock

Throughout much of the second quarter of 2009, global stocks rallied after a lackluster performance in the first quarter. Indeed, the Foreign Equity objective group posted a total return of almost 26% for the seven-month period through July. European stocks and U.S. stocks appear to have performed in line with each other. After reaching lows in the month of March, global stocks pulled ahead after signs of an economic recovery became noticeable, such as increased manufacturing orders in Germany (in June). On September 3rd, the European Central Bank kept the key interest rate at 1% and announced that the rate may remain unchanged, in order to ensure that the economy in Europe remains stabilized. In the Asia/Pacific area, Japan's stock market outperformed the European and U.S. markets, helped by the increasing number of Japan's exported goods. This month, we will take a look at a few mutual funds in the Foreign Stock model portfolio that may be of interest to you.

In the high-risk section of the model portfolio is Oakmark International Small Cap Fund (OAKEX). The fund seeks to achieve the objective of long-term capital appreciation. Management attempts to realize this goal by investing at least 80% of the fund's net assets in small-cap companies domiciled outside the United States. These small-cap companies generally have a market capitalization of less than $5 billion at the time of purchase. The fund may invest in mature markets, such as Japan, Canada, and the United Kingdom, or in developing markets, such as Mexico, Brazil, and South Korea. The fund may not invest more than 35% of its assets in securities of companies in the emerging markets. Management uses a bottom-up approach to select common stocks for the portfolio. It follows a value-oriented philosophy, in which it selects companies that are priced significantly below their true business value. When examining a candidate, management looks at a company's free cash flows and intelligent investment of excess cash, earnings that are growing and are reasonably predictable, and that have a high level of manager ownership, which will help align managements' interests with shareholders. As part of the selection process, management will also visit companies and speak to various industry sources. A security may be sold once a company's price approaches its estimated worth.

The fund posted a total return of nearly 39% for the year-to-date period through July, outperforming the Foreign Equity objective group by 12 percentage points. Its annualized total return has also bested that of the objective group over the trailing 10- year period. However, its level of volatility is above the objective group's overall average, which is why it received Value Line's risk rank of 5. Investors interested in this fund may obtain a prospectus by calling (800) 625-6275 or visiting the Web site www.oakmark.com.

T. Rowe Price International Discovery (PRIDX) is in the moderate-risk section of the model portfolio. The fund seeks to achieve long-term capital appreciation. Management attempts to achieve this goal by investing at least 80% of its net assets in small and mid-cap size companies from both developed (excluding the U.S.) and emerging countries. Normally, it seeks stocks that trading at reasonable prices relative to future earnings, cash flow, or book value. A bottom-up approach is used to select companies that have the potential to achieve and sustain above-average, long-term earnings growth. Management tends to favor companies with the following characteristics: solid balance sheets and relatively low debt, leading market positions, attractive business niche, strong franchise or monopoly, and seasoned management. To a lesser extent, management may invest in futures and options. A security may be sold in order to secure gains, limit losses, or invest in another more opportunistic candidate.

For the January to July period, the fund posted a total return of 35%, outperforming the Foreign Equity objective group by nine percentage points. Also, the fund has performed consistently well. In fact, its annualized total return has beaten both the objective group and the S&P 500 Index over the trailing three-, five-, and 10-year periods. Furthermore, it received Value Line's second-highest overall rank of 2. The fund's level of volatility is roughly in line with the objective group's average. More information about this fund is available by calling (800) 638-5660 to obtain a prospectus, or visiting the Web site www.troweprice.com.

In the low-risk section of the model portfolio is Fidelity Diversified International Fund (FDIVX). The fund's objective is growth of capital. In pursuance of this, management primarily invests its assets in non-U.S. equity securities, such as common stocks. When selecting stocks for the fund's portfolio, it uses a bottom-up approach, in which it uses fundamental analysis to find attractive securities. Management tends to look at a company's financial condition, earnings outlook, strategy, management, industry position, and economic and market conditions. Management may use various strategies, such as buying and selling futures contracts and exchange-traded funds in order to reduce the fund's exposure to security price fluctuations.

The fund posted a total return of 18% for the seven-month period through July. Its annualized total return has outperformed the Foreign Equity objective group over the trailing 10-year period. Its standard deviation, a measure of volatility, is slightly below the objective group's overall average. For the latest information about this fund, call (800) 544-6666, or visit the Web site www.fidelity.com.

Investors who would like to invest in an exchange-traded fund (ETF) may want to consider iShares MSCI-EAFE (EFA). It is appropriate for this asset class, and offers broad exposure to foreign stocks. To learn more about this offering, visit www.amex.com.