Time to look again at foreign investments

BOSTON — Could the international investments in your mutual fund portfolio be setting you up for a summer of anxiety, rather than rest and relaxation? Recent headlines suggest it's time to stay alert. Now may also be a good time to review whether a lower-risk approach is in order.

Consider that stocks lost much more overseas in May than they did here. The 6 percent drop in the Standard & Poor's 500 index was the smallest decline among more than two dozen developed markets around the globe. Not counting the United States, stocks in those countries dropped an average of nearly 12 percent.

Investors have been on edge ahead of the Greek election, when voters in the debt-burdened country could choose leaders who want to reject Europe's bailout money along with spending cuts. That could trigger a Greek exit from Europe's currency union, and maybe a breakup of the entire eurozone.

Investing requires accepting uncertainty. But recent market trends suggest there's plenty of unease.

"Uncertainty is high, and you'd be hard-pressed now to find any fund manager willing to say, 'Over the short term, stocks are going to rise rather than fall, or vice versa,'?" says Bill Rocco, a Morningstar analyst specializing in foreign stock funds.

Historically, foreign stocks have tended to rise and fall more dramatically than domestic ones. It's an important consideration for investors who are unusually risk-averse, and can't afford a big hit to their savings from a potential market decline.

If that's you, a lower-risk approach to international investing is advisable. You might want to trim your foreign holdings. Or consider switching to foreign stock funds that have delivered strong performance in the long term, with less volatility than their peers.

Below are three such funds that Morningstar gives a "low" risk rating.

The trio, ranked in order of their average 10-year annualized returns:

1. MFS International Value (MGIAX): 10-year annualized return: 8 percent

This fund carries a silver-medal rating, based on Morningstar's assessment of its future performance prospects. Morningstar cites the fund's consistency in limiting losses when stocks decline. Its 10-year record is in the top 1 percent of its foreign large-cap value peers, and it's in the top 2 percent over five years, and the last 12 months.

In 2008, it lost a relatively small 32 percent, about 10 percentage points less than its peers. A note of caution: This fund recently had nearly 25 percent of its portfolio in consumer defensive stocks such as food makers, a weighting that's nearly three times greater than its peer group. If stocks rally, that defensive approach could cause the fund to gain less than most peers.

2. Sextant International (SSIFX): 10-year annualized return: 7.9 percent

This fund finished in the top 8 percent of its category last year, when foreign stocks performed markedly worse than U.S. stocks. In 2008, the fund lost 27 percent, far below the average 44 percent decline in its category. It's the lowest-cost fund among the group of three, with an expense ratio of 0.88 percent. Nicholas Kaiser has managed the fund since 1995. He recently kept nearly 27 percent of the portfolio in cash, a defensive approach that could limit losses if stocks tumble. But if there's a rally, expect that big cash cushion to hurt performance.

3. Tweedy Browne Global Value (TBGVX): 10-year annualized return: 5.9 percent

This fund is a top performer. Its 10-year record ranks among the top 13 percent of its peers, and it's in the top 1 percent over the last 12 months, and in the last three- and five-year periods. Plus, it has a silver-medal rating from Morningstar.

Investing a smaller than average percentage of the fund's assets in financial stocks helped limited losses in recent years. It's run by four veteran managers, two of whom began when the fund launched in 1993.