Investing Insights: Russ Kinnel’s Favorite Funds

Russ, thank you so much for being here.

Russ Kinnel: Glad to be here.

Benz: Russ, when we look at fund flows, we see investors are sending the clear signal that the large-cap space is an area where they’re saying, “I might as well just buy a cheap index fund and call it a day.” That’s a reasonable way to go, right?

Kinnel: Absolutely. I think the bar has been raised for all funds. There are some really good low-cost active funds and good low-cost index funds, and you can be picky. Yeah, I think, absolutely: Passive is a fine option here.

Benz: You could potentially use an active fund to augment an index fund, it doesn’t have to be either/or.

Kinnel: That’s right. A lot of investors have a mix of active and passive, and I think certainly, you can do that. Large cap as well: You can have a total stock market, and then add in a value or growth fund–however you want. There’s a lot of different ways to slice it.

Benz: So you hinted that cheap is the name of the game. So if I’m looking at actively managed products and I want to make good selections, what’s kind of the upper limit I should put on expense ratios if I’m looking at large-cap funds?

Kinnel: Well, I suppose 1% is a simple rule of thumb. But you could also drive it down more if you want, 90 or 80 basis points. There are good active funds below all of those price points.

Benz: You brought a short list of funds that you and the team like quite a bit. One is T. Rowe Price Dividend Growth. This one kind of lands toward the mild side. Let’s talk about Tom Huber, who’s been running the fund for quite a long time, and why you like this strategy and some other factors in place here.

Kinnel: Sure. Tom Huber, as you said, has been running the fund since 2000. I always like it when you’ve got a manager with that kind of track record because you can go back and look at all of the calendar years, know that the manager owns all of that. It’ll help you to set expectations for both the upside and the downside. The dividend-growth strategies are kind of a good idea because in order to find dividend growers, you’ve got to look for companies with good balance sheets, good growth prospect, as opposed to if you’re looking just for yield, you might go for companies with not such great prospects but have really high yields. I think this is actually good, kind of defensive discipline, so it’s a good strategy, as you say. Leads to mild-mannered results, kind of higher-quality companies, so that generally, in downturns, this kind of strategy is going to lose less than the market, as a whole.

Benz: And as you hinted, Russ, this fund is not set up to deliver current income. So if you’re someone who wants a 3% yield, or something like that, you’re not going to get it here. It has a dividend growth strategy, so it’s looking for companies with a history of increasing those dividends.

Kinnel: Yeah, much more modest yield, something closer to the S&P. But, all in all, it’s a really strong package, and we rate it Silver.

Benz: OK, and expenses are pretty cheap, too. Let’s talk about Primecap Odyssey Growth. First, when I think of the highest-conviction management teams among you and the analyst team, it seems like this Primecap team is one you really like. Let’s just talk about what attributes are in place that you find so appealing.

Benz: Yeah, I actually own three Primecap funds.

Benz: I own one.

Kinnel: I’m a big fan, and I think they just are outstanding fundamental investors. You’ve raised the idea of passive and active at the top. I think I would hate to have to give up investing with Primecap because they just go really deep into their fundamental analysis with a really experienced team. So you’ve got very experienced analysts and managers who are just outstanding stock-pickers. This fund is large-growth. Nearly all of Primecap’s funds are large-growth. One concern is they are running a very large sum of money if you put all of their funds together. But they just do an outstanding job and at a reasonable fee.

Benz: These funds do run, though, to the more aggressive edges of the fund universe. They definitely have risk controls, but they will be volatile at various points in time.

Kinnel: That’s right. Growth has done so well lately that, if you just look at the last couple of years, you might not see that risk. But if you look longer-term, you’ll see the fund is going to give money back on occasion. It’s not a low-risk fund, certainly when value does well or when growth has a sell-off. These funds will get hit. They have a lot of money in tech and healthcare, so certainly not low-risk. To me, it’s a long-term investment that could pay off very nicely.

Benz: Primecap Odyssey Growth is open to new investors. A lot of the funds aren’t. Let’s talk about why that is actually a little bit of a plus–that they are trying to constrain asset flows on some of the funds that they run.

Kinnel: That’s right, they do. They have closed some of their funds, which is good, because the sum of all the money they’re running is quite large. The only one’s that are open are this fund–Odyssey Growth–and Primecap Odyssey Stock. There are three from Vanguard–are all closed. So they take a relatively prudent approach to managing assets. That is a welcome thing because, again, you want their stock picks to shine through.

Benz: So we’ve got one in large-blend, T. Rowe Price Dividend Growth, one in large-growth, Primecap Odyssey Growth. Your third large-cap pick is in the large-value space. This is American Funds American Mutual. First, before we get into what you like about it, let’s just talk about its availability because some investors might see this and say, “Well, I don’t have an advisor. I don’t want to pay sales charges.” Let’s talk about the accessibility of American Funds.

Kinnel: That’s right. We probably, most of us, know the A shares from American Funds the best, and that is the one with the front load you buy through an advisor. But they also have F1 shares that are available through No Transaction Fee supermarkets without the load. They typically run about 5 to 10 basis points more than the A shares. But the A shares are priced pretty cheaply, so it’s still actually a pretty attractive deal. They are now accessible to just about everyone.

Benz: So let’s talk about this fund in particular, American Mutual. It has a focus on dividends, and like all American funds, it employees a multimanager setup, where these managers run a component of the portfolio.

Kinnel: Yeah, the American Funds’ way is to have managers who operate independently–each has a sleeve. You might have, say, seven or eight managers with a sleeve. And then another sleeve might be dished out to the analysts, say, 15% or 20% of AUM might be in the analysts’ hands. So essentially, a bunch of people building this portfolio together. Some of the managers might be running fairly concentrated funds but, by the time you build out across all those managers and the analysts’ portfolio, you get to a fairly diversified portfolio. As you mentioned in this case, yield’s important to them. They also want industry leaders, so they’re not going to the extreme ends of yield. They want good companies at decent valuations, too.

Benz: And they avoid certain types of stocks, alcohol and tobacco stocks.

Kinnel: That’s right, sort of an ESG-lite. They do have some screens. It’s not really what you would call a full ESG fund, but it has long had this alcohol/tobacco screen.

Benz: Russ, I know Morningstar viewers and readers really like to get your recommendations. Thank you so much for being here.

Kinnel: You’re welcome.

Benz: Thanks for watching. I’m Christine Benz from Morningstar.com.

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Christine Benz: Hi, I’m Christine Benz from Morningstar.com. To some investors, mid-cap stocks represent the best of all words, in that they’re still nimble and growing, but they’re through their initial growing pains. Joining me to share some favorite actively managed mid-cap stock funds is Russ Kinnel. He’s Morningstar’s director of manager research. Russ, thank you so much for being here.

Russ Kinnel: I’m glad to be here.

Benz: Russ, let’s just talk about the thesis for mid-cap stocks. I think some investors do think that they kind of represent the sweet spot in a lot of ways. But, I guess, as an investor, do I need to carve out a dedicated fund that focuses specifically on mid-cap stocks, or is there another way I could play it?

Kinnel: Well, certainly if you have total stock market or extended market index funds, or some other funds that dip into mid-caps, you might not need it. But I do think it’s an important part of the overall market, and obviously it’s a good point for companies, because typically you’re talking about a company between $2 [billion] and $12 billion market cap, and that’s often a really good growth spot. So “the sweet spot” may be a little overselling it, but it is a good place to invest.

Benz: So here again, this is an area where if you want a dedicated allocation to mid-cap stocks, you’re perfectly fine doing an index fund, say a Vanguard mid-cap index or something like that, that is focused on mid-cap stocks. But we’re going to talk about some favorite actively managed funds. And one that you like, along with the team, is called Parnassus Midcap. People might know its large-cap funds, but this mid-cap fund might be a little less familiar. This one has an ESG mandate. Let’s talk about what that is and how this fund approaches that.

Kinnel: So, the ESG mandate means they are screening out companies that pollute, sell tobacco, defense companies, alcohol companies. A lot of screening out but also looking for companies that are good, sustainable companies to invest in as well.

Benz: There’s a growing appetite for funds that do have an emphasis on ESG, but I know that you and the team think that there’s a lot to like here from an investment standpoint as well. This is a fund that tends to behave, as far as I can tell, pretty well on the downside, so it’s not going to be the best, maybe, in a roaring bull market, but it’ll earn its keep when things are going down.

Kinnel: That’s right, and it’s kind of unusual, because it’s a fairly focused portfolio. Usually you think of more volatility because there’s more issue risk. But because of the quality focus in their strategy, you’re right, it actually makes the fund relatively defensive, which is a really appealing way to go–that stock picks have a big impact, but at the same time you’re not paying a big price in terms of volatility.

Benz: Vanguard Selected Value is another one that is on your list. It has multiple managers. It lands in Morningstar’s mid-cap value category. It’s a Vanguard fund, so its cheap price tag is an attraction. I guess a question is, since it has several managers, three managers, I believe, how do they keep it from kind of looking like a mid-cap value index?

Kinnel: Yeah, you know, they do have three subadvisors who are running mid-cap value dedicated strategies, so it is style-pure. In that way, it’s like an index. It charges 36 basis points, so in that way it’s like an index. But you do have three managers making stock picks, and it really shines through. Barrow Hanley has a majority of the asset, so it’s not evenly divided. Pzena and Donald Smith handle the rest. So you have three variations of kind of deep-value strategy. It really is a fairly distinctive-behaving fund. You can see, in years like 2018, it had a rough go of it because of all that exposure to deep value, has a lot in industrials, not that much in tech and healthcare, so it’s a relatively volatile fund. When you hear three subadvisors, you expect kind of big, bland indexlike performance. But if you look at the performance, it’s actually been pretty distinctive.

Benz: And this is one that we have in Morningstar’s 401(k) plan, actually. Another fund on your list, I think this one’ll be probably familiar to most of our viewers, Fidelity Low-Priced Stock. I guess the question is, with a veteran manager in place, and there’s so much to like about that, but also a very large asset base, why do you and the team continue to have a lot of enthusiasm for this fund?

Kinnel: Yeah, you’re right, it’s a really amazing fund. $31 billion in assets, 800 stocks. It really shouldn’t work. It should be a really boring fund at that point. But Joel Tillinghast is one of the more amazing investors out there. He just really has an incredible acumen for understanding the details. He’s got a value tilt to his strategy, likes relatively cheap companies, likes good yield, but it doesn’t have to have a good yield, and just has built a tremendous portfolio. It’s a wide-ranging one. Vanguard Selected Value is kind of focused on that mid-value space. Tillinghast’s portfolio really is all over the market. You see a lot of large-cap, some small-cap, some blends, some value. It’s really a wide-ranging portfolio. But at the end of the day, he’s just done a great job by any way you look. Now, someday, if he retires, then I’m probably not going to be as enthusiastic about the fund, but he’s still going great guns, he’s still doing a great job at the fund. Every once in a while we’ll try and trick him. You know, we’ll ask him about the 700th company on the list, and he knows it flat. He’s not just delegating all that authority. He really knows his companies.

Benz: Russ, always great to get your recommendations. Thank you so much for being here.

Kinnel: You’re welcome.

Benz: Thanks for watching. I’m Christine Benz for Morningstar.com.

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Christine Benz: Hi, I’m Christine Benz for Morningstar.com. Small-cap stocks can add some oomph to a portfolio, but they also have the potential to add some volatility. Joining me to share some favorite small-cap actively managed stock funds is Russ Kinnel. He’s Morningstar’s director of manager research. Russ, thank you so much for being here.

Russ Kinnel: Happy to be here.

Benz: Russ, let’s talk about small-cap stocks–how investors should approach this because there’s some academic data that points to small-cap stocks outperforming the broad market over time, but probably don’t want to go crazy with them. You want to right-size your allocation. What’s kind of an approximate weighting within my equity portfolio that I might dedicate to small-cap stocks?

Kinnel: Well, small caps represent a little less than 10% of the market, so I think anywhere between 5% and 15% would be a reasonable weight. Obviously, you could go above or below that, but I think that’s generally a ballpark figure that works for most people.

Benz: So let’s get into some of these funds. They’re actively managed. Before we get into them, let’s just talk about indexing this space. That’s a viable idea as well, right?

Kinnel: That’s right. It is a viable idea. Active small-cap funds have done better versus the benchmarks than in large-cap space. So some people who will do large cap passive will go with small caps, but I think both are legitimate ways of investing in the small-cap area.

Benz: We’re going to look at some of your favorites. Let’s start with Mairs & Powers Small Cap. People might be familiar with Mairs & Power Growth, which is a large cap-oriented fund. This one lands in the small-cap blend category, and it’s Silver-rated. Let’s talk about what you like about it.

Kinnel: It reopened in the fall of last year. So I always like to get funds after they reopen. It’s a bit of a contrarian signal.

Benz: Why is that?

Kinnel: Well, because generally you’re reopening because investors have gone out of the fund a little bit, which is often a signal that it may be time to get in. And this fund actually closed at a very low level anyway, so I think actually they’re very prudent about managing that asset base. It’s a fund that looks for companies with sustainable competitive advantages, and it has a bit of a defensive characteristic to it, so that in most down markets, it loses less, which I like a lot.

Benz: Right. Another thing about it, like all of the Mairs & Power funds, it focuses on companies that are based kind of in its general environs, so in the Midwest. What’s going on there, and what’s the thesis there?

Kinnel: Yeah. It’s a little quirky. They’re based in Minnesota, and they invest in a lot of companies that are not far from Minnesota, which is a little odd, but at the same time, they do a great job with it. As I mentioned, the portfolio is fairly defensive, so it’s not like you’re being exposed to extreme risks. Again, we talked at the beginning about how this–Say your total small-cap exposure is 5% to 15%, and let’s say this is one of two, then that means a fairly small part of your portfolio. So, I don’t think it is that big a deal that they have this unusual regional focus. They’re not exclusively dedicated to the Midwest, but it’s mostly in Midwest.

Benz: So you mentioned that that one tends to be kind of a mild-mannered fund, a good performer on the downside. Loomis Sayles Small Cap Growth definitely runs toward the more aggressive side of the spectrum within the small-cap space. Let’s talk about it and why you and the team like its strategy.

Kinnel: It’s also recently reopened, also Silver-rated. Managers Mark Burns and John Slavik have run the fund since 2005, so really nice track record, really kind of a classic growth strategy. And, again, as the fact that they were closed and then reopened indicates they are mindful of their capacity, which is a huge thing, especially in small growth because small growth is also another word for momentum, really. Small-cap companies are growing well. All of a sudden, momentum trade piles in and it can push it up and down very quickly, and so capacity is really important here.

Benz: Finally, let’s discuss LSV Small Cap Value. This one, too, is Silver-rated. This is a quantitatively managed fund, and I guess the question is: There have been so many new factor-based ETFs that in some ways kind of replicate quant strategies, at least in my mind. How does this fund, do you think, add value within this increasingly crowded space?

Kinnel: That’s right. There’re a lot of ETFs, a lot of strategic-beta variations that you can find out there and that I think raise the bar for any kind of quantitative strategy, but this one isn’t simply one or two screens. This is a firm that employs a lot of Ph.D.s, who do a reasonable job of building models, and they keep updating things, but they also don’t seem to be the kind who chase every last factor down. So, I think you got a nice well-built portfolio from this process. It cost a little more, but if you look at the long-term performance record, it would seem to justify it.

Benz: Russ, I know our viewers always love to get your picks. Thank you so much for being here.

Kinnel: You’re welcome.

Benz: Thanks for watching. I’m Christine Benz for Morningstar.com.

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Christine Benz: Hi, I’m Christine Benz for Morningstar.com. World-stock funds are incredibly flexible. They can invest in the best companies in the world regardless of where they are based. Joining me to share some favorite world stock actively managed mutual funds is Russ Kinnel. He is Morningstar’s director of manager research.

Russ, thank you so much for being here.

Russ Kinnel: Glad to be here.

Benz: Russ, let’s just talk about these funds at large. They can invest in foreign or U.S. stocks, and that seems really appealing. But as a practical matter, how do these funds typically allocate between U.S. and non-U.S. stocks?

Kinnel: The typical fund in world stock has slightly more in U.S.; about 52% U.S., 44% foreign, and the rest in cash. So, there is a slight U.S. tilt. Of course, the U.S. has been doing much better than most foreign markets over the last five to 10 years. So, that may also be a bit of simply appreciation or trend-chasing. Maybe the next few years of foreign outperformance, I wouldn’t be surprised to see that even up a little more.

Benz: So, that’s kind of in line with the global market capitalization. Actually, maybe the U.S. right now, I think, is a little more than 50%. Let’s talk about using just an index fund to give you global stock exposure. That’s an increasingly viable option, right? There are some good products that do that.

Kinnel: Exactly. You can buy total world stock index funds for very cheap today. Or you can buy an international and a U.S. total market. Glue them together, you get the same thing. Depends how much flexibility you want. But you are right, once again, this is an area that indexing does well.

Benz: But let’s look at some of your favorite actively managed funds. Starting with Vanguard Global Equity, the advantage of this one is that it’s a good cheap fund, but it is actively managed. Let’s talk about what you and the team like about it. It earns a Silver rating currently.

Kinnel: That’s right. Vanguard often talks about how it’s not active versus passive–it’s cheap versus expensive. So, when you have an active fund from Vanguard charging 48 basis points to cover the whole world, that’s a pretty good deal. In this case, the fund has two subadvisors, Marathon and Baillie Gifford. Two very good advisors. Marathon is a little more core; Baillie Gifford is a little more growth. So, you kind of end up on that blend/growth line in the style box. But if you look at the long-term results of the fund, they are very strong over the 10- and 15-year period. Again, you have good subadvisors and a very low cost. That’s why some of these Vanguard actively managed funds are so appealing.

Benz: Let’s look at Oakmark Global. This is a fund that, I think, has a lot of appeal in that we like Oakmark’s U.S. funds and we like its international funds. So, it makes sense that they should have a good global fund.

Kinnel: If you think about it, in a way it’s almost a complete opposite of what we’re talking about–a world stock market index fund that’s going to have thousands of securities; this one has just 40. You’ve got a pair of U.S. managers, a pair of foreign managers. Clyde McGregor, who we know from Oakmark Equity Income; David Herro from Oakmark International. Just 40 names. And they’ve obviously proven to be very good stock-pickers. So, when you have great stock-pickers covering the world, it’s really an appealing package.

Benz: So, I know one thing that you and the team have been keeping an eye on is that Clyde McGregor has announced that at some point in the relatively near future he will retire from the fund. Do you feel like there is a good succession plan in place?

Kinnel: Yeah, there is. Oakmark has got some–I mentioned there are four portfolio managers. So, they’ve already kind of got the implied successors, really, for both Herro and McGregor on this fund–seasoned managers who we expect to maintain that strategy going forward.

Benz: Causeway Global Value is your last of these three world stock picks. I know that Causeway International Value has been a fund that we’ve long liked. What about this Global Value do you like, and what gives you confidence in Causeway’s ability to manage U.S. equity assets?

Kinnel: Yeah, you’re right. So, this is a more recently launched fund–still very small asset base, which is pretty appealing. But they’ve actually been running a version of this since 2000, and this fund has a good record albeit going back to ’08. Though more recently, it hasn’t done that well, partly because of its value tilt, partly because it’s tilted more towards foreign than the U.S. But it’s run by the same managers–Harry Hartford, Sarah Ketterer–in a value strategy that’s very appealing. So, on the surface level, you see recent performance isn’t that good. But again, there’s a lot to like here.

Benz: What’s its approach to emerging markets? I know that International Value tends to be mainly developed markets. Does this one avoid emerging markets as well?

Kinnel: Yes, it does. So, it’s a little unusual beast as well.

Benz: Russ, always great to get your picks. Thank you so much for being here.

Kinnel: You’re welcome.

Benz: Thanks for watching. I’m Christine Benz for Morningstar.com.

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Christine Benz: Hi, I’m Christine Benz for Morningstar.com. Foreign stocks have underperformed U.S. for the better part of a decade, but to be diversified investors still need them. Joining me to share three favorite foreign-stock funds is Russ Kinnel. He is Morningstar’s director of manager research.

Russ, thank you so much for being here.

Russ Kinnel: Glad to be here.

Benz: Russ, let’s talk about international funds generally. If investors have them in their portfolios, they are probably not loving them, at least over a long time period. Recently, they’ve been performing pretty well. Let’s talk about why investors should keep the faith in having foreign-stock holdings in their portfolio.

Kinnel: The U.S. is about half the world market cap right now, which means, there’s a large part that’s not the U.S. And historically, the U.S. is just as likely to lag as it is to lead. It’s been leading for a while now. And people often talk themselves into thinking, well, either the U.S. is better or foreign is riskier, and I think both are kind of dangerous views, especially if we’ve had a long run-up. I remember in the late 90s, a lot of people said, all you need is the U.S. And then, the bear market came, and it hit U.S. equities much harder than most foreign. And so, I think it’s a dangerous proposition. If the overall world market cap is half, then it seems to me that close to half has got to be your default. I think that means most people are significantly underweight, and I think that’s a mistake.

Benz: And maybe as you get older, you’d want to think about having a little bit more of a consideration for volatility, because you do get some foreign-currency volatility especially with some of these funds. So, maybe you’d back off that maybe half weighting in foreign stocks if you’re …

Kinnel: Or you could choose a fund that’s hedged or just ones that are less volatile than their peers. But for sure, if you’re retired and starting to draw down, certainly that’s a little bit of an additional challenge.

Benz: Let’s talk about your first pick. This one will be, I think, entirely uncontroversial. This is Vanguard Total International Stock Market Index. This one you can buy either as a traditional mutual fund, you could also buy the ETF version. It’s Gold-rated. Let’s talk about what’s to like about this fund.

Kinnel: Well, the case here is really the case for indexing. Low costs. Large-caps are pretty efficient markets and in a case like this fund, you are covering everything pretty much outside the U.S. When you choose a foreign index fund, one of the key considerations is, Do you want emerging markets or not? This fund has actually more than most of its peers, both index and actively managed, in foreign. But some people say, well, I want active for emerging markets. Either way I think is absolutely fine. Just make sure you look at that because some have almost no EM, some foreign index funds. This one has a fair amount in emerging markets. So, just kind of know that going in. Vanguard has a couple of versions. There are lots of ETFs that have every kind of version you could possibly want.

Benz: Right. Let’s talk about Vanguard International Growth. This is an actively managed fund. It’s one I own in Morningstar’s 401(k). Let’s talk about what you and the team like about this one.

Kinnel: Vanguard does a very good job with active funds because they start with very low costs. So, you are only giving up a few basis points over an index fund and yet you got some very good active managers. This fund is divvied up among three subadvisors who are very good managers, and it’s really produced outstanding results. So, good managers and low costs. This has a growth tilt, though. So, you may want a value fund to offset it.

Benz: That leads nicely to the next pick. This is Dodge & Cox International Stock. Dodge & Cox certainly many people know for its value bent on the U.S. equity side, but these are pretty good foreign-stock managers as well.

Kinnel: They really are. I own this fund, so obviously I believe in it. Low costs. I really like Dodge’s stability. The analysts and managers tend to stay there their whole career. It’s kind of a team setup with a lot of hands in the fund, but just a good value strategy. So, I think, I have a lot of confidence in this fund for a long run. If you go back to ’08, you see they did take it on the chin then. So, it’s not without risk. But I think it’s a very solid value fund that would fit in a lot of portfolios.

Benz: Dodge & Cox, of course, sort of at the top of our list when we think of good stewards of shareholder capital.

Kinnel: They are very good stewards. They really think about investors. They keep costs low. They have a good setup for their ownership structure. So, it’s not like someone can retire there and then sell them off to a big fund company. They have to sell back to employees of the firm when they retire.

Benz: If investors have not looked at their portfolios, foreign versus U.S. stock weightings, your counsel is maybe to take a look at that, see whether some rebalancing is in order.

Kinnel: That’s right. Realize that the defaults are–the overall market is saying about 50-50. So, you should have good reasons for going well away from that.

Benz: Russ, thank you so much for being here.

Kinnel: You’re welcome.

Benz: Thanks for watching. I’m Christine Benz for Morningstar.com.

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Christine Benz: Hi, I’m Christine Benz for Morningstar.com. Investors may be tempted to give up on their foreign-stock holdings, but Morningstar’s director of Manager Research Russ Kinnel says not so fast. He is here with me today to share two favorite more-specialized foreign-stock funds.

Russ, thank you so much for being here.

Russ Kinnel: Glad to be here.

Benz: Russ, let’s just start by talking about the thesis for making sure that I hold, and that investors hold, foreign stocks in their portfolio. They’ve performed a bit better recently, but I think that some investors might be looking like at 10-year returns and might be pretty tempted to, if not cut their foreign-stock holdings, at least maybe not top them back up. Let’s talk about the case for international diversification.

Kinnel: Foreign equity is about half of the overall global market cap. But if you look at history, we see that generally the U.S. takes a turn leading and then you might go two decades where other markets are leading. And so, you are really giving up a lot of diversification and just a lot of good companies, a lot of great companies outside the U.S. So I think most people are better off with a meaningful exposure to foreign equities.

Benz:We’re going to be talking about some more-specialized foreign-stock funds. Let’s just do a little bit of stage-setting on that. Before I consider funds like the ones we’ll talk about, I probably want to make sure that I have something big and broad supplying foreign-stock exposure first.

Kinnel: That’s right. These are foreign small- and mid-cap funds that I’m going to recommend. But right, first take care of that core and make sure you’ve got some foreign large-cap names. These small- and mid-caps are probably better no more than, say, 10% of your portfolio. I really wouldn’t make it a huge position, but I do think they are valuable diversifiers.

Benz:Let’s start with one that is a foreign small-mid blend fund. It’s Bronze-rated. This is FPA International Value. It might be not so familiar to some of our viewers, so let’s talk about why you like it.

Kinnel: It’s a small fund, only about $250 million. We only recently upgraded it to Bronze. It’s run by Pierre Py, who came from Harris Associates which runs Oakmark. If you know Oakmark International, you’ll recognize some of the characteristics here, focus on stocks trading at a big discount to intrinsic value, concentrated portfolio. It’s a little different though in that it’s got more in cash and it’s smaller in market cap, though it doesn’t have any market-cap restrictions. But what we like about it is, he has really demonstrated he is a good equity manager. At first we were a little wary of the fund because when he came on board in 2011, there was some turnover in personnel, but that stabilized and so has the portfolio, and now it’s a pretty appealing fund.

Benz:At the growth side of the Style Box a fund you like is Artisan International Small-Mid Investor. This lands in the foreign small- and mid-growth category. It too is rated Bronze. Let’s talk about that one.

Kinnel: This fund has changed completely. The firm brought in Rezo Kanovich from Oppenheimer International Small-Mid and now it’s a very aggressive growth fund. So, he did a tremendous job at Oppenheimer with large sum of money. Now, he is running about $600 million at Artisan. So, he has got a smaller asset base to manage which I love, but he really did a tremendous job with kind of theme-driven growth investing. So, I think it’s a really appealing fund to get in on right now. But it is aggressive, so – I already mentioned earlier, don’t go nuts with a big weighting. This is definitely a fund I would not put over 10% of my portfolio in.

Benz: Right-size the holding size. You mentioned a couple of times, Russ, the importance of size to you when you think about products like these that focus on small- and mid-cap stocks. Let’s talk about why that’s a consideration. If it’s a very large-cap fund, you don’t need to worry so much. But once you are looking at something that focuses on smaller stocks, why you should care about that?

Kinnel: Well, I think smaller caps can be more volatile. You would hate to miss out if there is a big large-cap rally. You’d hate to miss out simply because you are in small. In the case of these two particular funds, they each have reasons that make me think they will continue to be volatile. One is a focused fund; the other is a very aggressive growth fund. So, put all that together and I think it makes sense to manage your risk by keeping position size small. That’s probably the easiest and best way to do it.

Benz: I know that we tend to think highly of those firms that watch asset growth, too, that aren’t just taking in all the assets that they can, that actively manage asset size and close funds preemptively.

Kinnel: That’s right. Both Artisan and FPA have a pretty good record of closing funds. So, I think in both of these cases, if they are successful, I would imagine they will close at a fairly good point, so that the managers can keep doing what worked all along.

Benz: Sounds like a worthy short list of funds, worthy of further investigation. Russ, thank you so much for being here.

Kinnel: You’re welcome.

Benz: Thanks for watching. I’m Christine Benz for Morningstar.com.

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