For years, American Funds' Growth Fund of America (AGTHX) remained true to its name.
With nearly all its assets in U.S. growth stocks, the fund compiled a successful track record and came to rank as the biggest mutual fund, with $179 billion in assets. But, lately, Growth Fund of America has veered from its traditional path. Now, 20% of assets are in foreign holdings, including German software powerhouse SAP (SAP) and Swiss pharmaceutical company Roche (ROG.VX).
American Funds is hardly alone. Many domestic funds hold big stakes abroad. Top performers with more than 20% of assets in foreign stocks include GM Focus (CGMFX), Fidelity Contrafund (FCNTX) and Royce Low-Priced Stock (RYLPX). "The distinction between foreign and domestic funds is becoming less clear," says Greg Wolper, senior fund analyst for Morningstar.
Fund managers say they have been looking abroad in search of bargains or fast-growing companies. Until the recent market downturn, many foreign bets paid off handsomely, the managers note. During the five years ending in 2007, the Morgan Stanley Capital International EAFE index returned 21.6% annually, outdoing the S&P 500 by more than 8 percentage points. But this year, the tables have turned. For the first seven months of 2008, the S&P 500 outpaced the Morgan Stanley international index by more than a percentage point.Now that foreign stocks are dragging down results, shareholders may question the wisdom of domestic portfolio managers who shop abroad. Some financial advisers go further, viewing the shift to foreign stocks as an undisciplined strategy. These advisers prefer funds that stay pure, focusing on one style, such as domestic small growth or foreign large value. With pure funds, an investor can control a portfolio's allocations to foreign and domestic stocks.