Great Foreign-Fund Duos for Your Portfolio

But constructing a good multifund international portfolio can be pretty challenging. Overexposure to particular countries, sectors, investment styles, and market-cap ranges can be a real problem even when combining funds from complementary categories. And stock overlap also can be an issue. As we noted in a series of columns earlier this year, there can be significant stock overlap between many foreign large-growth and foreign large-value funds, between some foreign large-cap and foreign smaller-cap offerings, and between certain overseas blue-chip and emerging-markets funds.

With that in mind, we decided to identify four pairs of attractive international funds that complement each other nicely. Three of the pairs mix funds from the opposite corners of the style box that have fairly strict stock-selection disciplines. The fourth pair combines a foreign large-cap offering that has limited-to-moderate exposure to the developing world with a diversified-emerging-markets fund that readily ventures beyond the mainstream. Here are the details.

 Dodge & Cox International Stock and  T. Rowe Price International Discovery
Both of these funds boast impressive management teams, attractive expense ratios, and strong records. The former is one of the more miserly members of the foreign large-value category and gravitates toward the traditional value sectors, whereas the latter is a hard-core foreign small/mid-growth vehicle that favors the popular growth industries and pays significant attention to micro-caps. Thus, the combined portfolio provides broad and balanced exposure across sectors and includes very few overlapping stocks. (The funds, in fact, currently have no names in common.) And because both funds typically own a number of smaller- and emerging-markets stocks and hold many mid-cap issues, the combined portfolio also spans the globe and the market-cap spectrum.

Interested investors should, however, recognize that smaller-cap and emerging-markets stocks have dominated abroad in recent years and that these two offerings are likely to suffer more than their category rivals when such stocks cool off. Investors who can handle such risks and want far-reaching and somewhat bold overseas exposure should be happy with this package.

 American Beacon International Equity and  Forward International Small Company PISRX
American Beacon International Equity has earned a strong long-term risk/reward profile with a multimanager format that divides its assets among a handful of talented value hounds. Forward International Small Company has delivered the goods with a diversified small-growth style. Both funds are developed-markets oriented, but the latter pays significant attention to Pacific-Rim and smaller-European markets, which means the combined portfolio has reasonable geographic balance. Although both also make full use of the sector spectrum, neither makes big industry bets, so the combined portfolio also provides fairly broad sector exposure. And American Beacon International Equity's average market cap is much higher than the foreign large-value norm, while Forward International Small Company's average market cap is well below the foreign small/mid-growth norm. Thus, it comes as no surprise that the two funds usually and currently have zero to negligible stock overlap.

This combination delivers broad sector and market-cap exposure with a developed-markets bias. Investors seeking that sort of international portfolio should note that these two funds have other conservative features besides their limited emerging-markets stakes. Thus, this combo may not deliver as exciting returns as some others.

 USAA International and  Artisan International Value ARTKX
David Mannheim has earned strong results at USAA International and elsewhere with a moderate-growth strategy, while David Samra has gotten to an excellent start at Artisan International Value with a stringent value style. There tends to be very limited stock overlap between the two offerings, even though Samra considers larger-cap as well as smaller-cap bargains. That's because Mannheim favors giant caps, and both managers own fewer names than their peers. (Samra, in fact, typically owns just 40-50 names.) Mannheim invests across the industry spectrum, while Samra considers fallen growth stocks as well as traditional value fare, so the combined portfolio provides fairly broad sector exposure. And because both managers consider opportunities outside Europe, the combined entity has a reasonably wide geographic range.

This duo provides wide-ranging developed-markets-oriented international exposure in a pretty focused collection of stocks. Interested individuals should be aware, however, that the issue concentration is likely to lead to volatility at times.

 Evergreen International Equity and  Oppenheimer Developing Markets ODMAX
These two offerings have superior records and talented managers, and their investment strategies complement each other nicely. Gilman Gunn of Evergreen International Equity is a risk-conscious foreign large-blend manager who runs a rather diversified portfolio and normally keeps his emerging-markets stake moderate and focused on well-known names. Mark Madden of Oppenheimer Developing Markets is an adventurous skipper who pays considerable attention to the developing world's less-popular and smaller markets and names. (Oppenheimer Developing Market currently sports relatively hefty stakes in India, Indonesia, and Egypt along with an average market cap that is half its category norm). Thus, the combined portfolio provides broad geographic, sector, and market-cap exposure, and it has quite limited stock overlap.

This combo mixes exciting emerging-markets names with mainstream blue-chip stocks. Fans should recognize that emerging-markets offerings have really outperformed in recent years and may well underperform before too long.