Foreign Leads Domestic

December 6, 2012

After two months of declining markets, U.S. stocks rallied to end November with a gain while foreign markets proved even more resilient. Who would have guessed? Fear of unresolved debt issues at home and abroad, on top of persistently slow growth, continue to deter investors. Though despite much gloom and doom, markets chugged along.

Remember that markets are forward looking, and that even without resolution, most of the current concerns about the market may already be priced in. Markets tend to price in the worst once they recognize a problem because resolution is uncertain. Once a path to resolution is clear, markets adjust in anticipation of recovery.

What’s Working
Foreign funds surged in November and now have the top returns. This places them ahead of most domestic funds in our ranks this month. In Class 3 core funds, just one domestic fund – Ariel – is in the Buys. International value, Europe, and EAFE index funds make up the rest of the Class 3 Buys. Roughly two-thirds of the Buys in Class 2 are international, mostly focused in Europe, and the domestic winners are growth funds, mainly small-cap. Among the concentrated funds in Class 1, Six single-country ETFs are highly ranked along with one leveraged Europe fund. The rest of the top-ranked sector funds continue to be those focused in homebuilders and biotech.

Fixed Income
Bonds had another good month in November, led by long-term U.S. government bonds and emerging market bonds; each category is up more than 1.2%. Government bonds were nudged by a slight decline in interest rates – the 10-year Treasury yield fell from 1.72% to 1.62% on the month. Tax-exempt munis also had a particularly strong month, surging over 1.5% on average. Investment-grade corporates and high yields prospered as well. Foreign bond funds that are dollar hedged gained for the month, while un-hedged, local currency funds lagged.

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