Gregg Wolper, Ph.D., is a senior manager research analyst for Morningstar.
Expectations of stronger growth in the United States fueled part of that surge; and in most of Europe, cautious optimism and modest but encouraging rates of growth replaced years of concern about weak economies, heavy debt burdens, and political turmoil. (An exception was the United Kingdom, where the ongoing negotiations over the country's prospective exit from the European Union brought uncertainty and concern.) Japan's economy also perked up.
Meanwhile, emerging markets were especially strong, bolstered most spectacularly by stunning gains in Chinese Internet and technology stocks. Some of these companies rose 60% or more in 2017, with one of the heavyweights, Internet conglomerate Alibaba
, nearly doubling in price.
The extent of the gains for other emerging markets was equally astounding, as illustrated by the 46.8% return enjoyed by the India stock Morningstar Category. But not every emerging market was that strong--the gains in Russia and Mexico were more pedestrian, for instance. But overall, the diversified emerging-markets category posted a very healthy 34.2% average return.
The vast majority of currencies around the world also strengthened against the U.S. dollar. That provided a boost for nearly all U.S.-based stock funds investing in foreign markets. When these funds translate the returns of their stock holdings into dollars for their U.S. investors, the returns include not just the increase in price of their stocks but the increase in currency value as well. The only funds that didn't receive this extra bonus were the few that fully hedged their foreign-currency exposure into the U.S. dollar.
The impact of currency gains was substantial. The MSCI Europe Index, for example, rose 13.1% in local-currency terms, but gained a mighty 25.5% when translated into U.S. dollars.
With markets so robust overall, the international-stock funds that failed to keep pace typically held more than a few percentage points of assets in cash, or they shied away from the high-flying, market-leading Internet and technology stocks.
Invesco International Growth
, which had a strong long-term record entering 2017, brought up the rear of the foreign large-growth category (while still posting a not-exactly-shabby 22.6% return). Its managers believed that Internet leaders such as Tencent and Alibaba were overpriced, and they had similar trepidation about strong-performing stocks from other areas, such as luxury-goods makers Kering and LVMH. The absence of these stocks from the fund's portfolio cost it relative to many rivals; a high-single-digit cash stake also held down returns. First Eagle Overseas
landed near the bottom of the foreign large-blend category for similar reasons.
Toward the other end of the spectrum stood T. Rowe Price Emerging Markets Stock
. Tencent was that fund's top holding all year, with Alibaba also in the top five; those two companies alone contained more than 12% of assets as of Sept. 30. The fund had a minimal cash stake, and a number of big winners outside the tech and Internet arena could also be found among its larger holdings. One was Sberbank, which defied the Russian market's otherwise sluggish year to post a strong gain; another was Asian insurance firm AIA. Both rose more than 40%. This fund gained 42.9% for the year, beating roughly 90% of its diversified emerging-markets category rivals and topping the MSCI Emerging Markets Index by nearly 6 percentage points.
Owning the Chinese stars wasn't necessary to stand out, though. Oakmark International
had a good year without Alibaba, Tencent, or JD.com, posting a 29.8% return that comfortably beat the MSCI ACWI ex USA Index and nine tenths of its foreign large-blend rivals. (It did own Baidu, which didn't gain as much as those three.) The fund held big gainers Kering and LVMH from the luxury-goods field and a wide variety of other winners from areas outside of the tech sector, such as Diageo and Glencore.