Best International Funds, Dividend-Stock Deep Dive, and Why Diversifying is Getting Harder

Plus our latest insights into the Russia/Ukraine invasion and the market. [Morningstar](?utm_source=eloqua&utm_medium=email&utm_campaign=newsletter_smartinvestor&utm_content=34771&elqTrackId=11d645dd3db545fabc461debc5b46e06&elq=b526c4a519b9452e850c74df7b70ab1e&elqaid=34771&elqat=1&elqCampaignId=16203) [Smart Investor] Smart Investor with [Susan Dziubinski, Director of Content]( [Susan Dziubinski] Russia/Ukraine Invasion and the MarketsAs the war in Ukraine continues, our [markets team]( and analysts have been working overtime to put the extraordinary events into context for investors. They’ve isolated [funds with heavy weightings in Russian debt]( and [those holding the most assets in Russian stocks](. They’ve talked with [top emerging-markets fund managers about their outlooks](. They’ve examined [why renewable energy stocks have surged along with oil prices](. Morningstar U.S. market strategist Dave Sekera did his part, isolating [15 undervalued growth stocks]( amid the continued market volatility. What are Dave’s expectations for the market near-term? “Broadly, it is notoriously hard to predict how geopolitical events will evolve,” he reminds us. “We expect stocks will remain volatile in the short term with brief sell-offs if further escalation arises, or a snap-back rally if further Russia ceases additional military escalation.” To stay on top of the ever-changing conditions and what they mean for investors, bookmark and frequently visit our [Special Report](. The Best International Stock FundsAs 2022 kicked off, [many market experts]( forecast a slowdown in U.S. stocks over the coming decade. In fact, most expect better returns from non-U.S. companies in the next 10 years, given their relative underperformance: At 2021's end, the average U.S. large-blend fund had trounced the average foreign large-blend fund by more than 10 full percentage points annually over the trailing three-year period. My [Our Picks]( column this week takes a look at what Morningstar considers to [be the best international-stock funds and exchange-traded]( funds. About two dozen funds have share classes that earn our top fund analyst rating of Gold. The list includes both passive and active strategies, value and growth approaches, larger companies and smaller fare, and developed and emerging markets. How much international exposure does your portfolio need? That of course depends on your life stage and investment personality. But if you’re looking for a starting point, [Morningstar’s lifetime allocation indexes]( include non-U.S. stock positions that range from 6% to 42%. Why Diversifying a Portfolio Is Getting HarderI didn’t suggest that investors consider international funds for their diversification value. That wasn’t an oversight--it was intentional. As my colleague [Amy Arnott]( pointed out this week in [Why Diversifying Your Portfolio Is Getting Harder]( correlations between U.S. and non-U.S. stocks have increased quite a bit during the past decade--meaning that returns for these two asset classes have moved largely in the same direction for much of the time. Indeed, Amy and colleagues [Christine Benz]( and [Emory Zink]( argue in their new [diversification landscape paper]( that diversification as a theory may not be broken entirely, but there is evidence that correlations between stocks and bonds may rise during an extended period of rising interest rates and/or inflation. We’ll be unpacking more of this research in the coming weeks on Morningstar.com and talking with the team about their findings and key takeaways for investors. So don’t toss aside the concept of diversification--at least not yet. Stock of the Week: TargetShares of no-moat Target TGT jumped nearly 10% midweek after the company reported good sales growth for the fourth quarter and forecast low- to mid-single-digit revenue growth and low-single-digit operating income growth for fiscal 2022. Morningstar analyst [Zain Akbari]( [noted]( that we’ll be raising our fair value estimate of the stock by about 10% as a result. “The uptick is driven by a more optimistic outlook for Target’s near- and long-term top-line prospects, considering its burgeoning omnichannel strength, and the rescission of our prior expectation that the U.S. corporate tax rate would rise this year,” explained Zain. The retailer still hasn’t carved out an economic moat, though, due to the lack of switching costs and undifferentiated product assortment. Despite the fair value boost, shares look pricey as of this writing. Dividend-Stock Deep Dive: EnergyIn our [latest episode of Dividend-Stock Deep Dive]( host [David Harrell]( talks with Morningstar’s director of equity research for energy and utilities [Dave Meats]( about dividend opportunities in the energy sector. As our colleague [Lauren Solberg]( [noted last month]( the energy sector’s dividends are growing faster than other sectors in the U.S. market. And in the new episode, Dave explains why and discusses the emergence of variable dividend policies among exploration and production companies. He also shares a few of his favorite names in the sector--perhaps providing some new ideas for a dividend-seeker’s watch list. ADVERTISEMENT [media]( [media] Morningstar Specialists [A Tax-Efficient Portfolio Makeover May Be Less Painful Than You Think]( [A Tax-Efficient Portfolio Makeover May Be Less Painful Than You Think]( Proper accounting of cost basis is essential to avoid paying more taxes than you need to. Christine Benz [3 Top Funds Losing Their Managers ]( [3 Top Funds Losing Their Managers]( Manager changes at Vanguard, Oakmark, and Fidelity in perspective. Russel Kinnel [Sustainable Funds Have Lower Russia Exposure]( [Sustainable Funds Have Lower Russia Exposure]( But is it appropriate to invest in autocratic regimes at all? Jon Hale, Ph.D., CFA [The Best International Stock Funds for 2022]( [The Best International Stock Funds for 2022]( These international mutual funds and ETFs all earn Morningstar Analyst Ratings of Gold. Susan Dziubinski [How Have Low-Volatility Funds Performed in 2022?]( [How Have Low-Volatility Funds Performed in 2022?]( And are there any Morningstar Medalists in the group? Ben Johnson, CFA [How MeToo Forced Companies to See the Business Risks of Sexual Misconduct]( [How MeToo Forced Companies to See the Business Risks of Sexual Misconduct]( Change is slow but inevitable. Leslie Norton, Ruth Saldanha [Why Economists Failed to Predict Inflation’s Return]( [Why Economists Failed to Predict Inflation’s Return]( Habit, selectivity bias, and groupthink. John Rekenthaler [Why Diversifying Your Portfolio Is Getting Harder]( [Why Diversifying Your Portfolio Is Getting Harder]( Spreading out your bets makes sense, but it doesn’t always pay off. Amy C. Arnott, CFA [More Market Turmoil Doesn't Deter ETF Investors in February]( [More Market Turmoil Doesn't Deter ETF Investors in February]( Exchange-traded funds hauled in $69.5 billion in a turbulent February. Ryan Jackson, Ben Johnson, CFA [War May Delay Progress on Emissions Cuts, Chill Interest in Sustainable Investing]( [War May Delay Progress on Emissions Cuts, Chill Interest in Sustainable Investing]( Even as U.N. panel finds globe is warming fast, oil prices climb. Leslie Norton [The System Still Fails Small 401(k) Plans]( [The System Still Fails Small 401(k) Plans]( Workers at companies with small plans are burdened by high costs. John Rekenthaler Popular This Week [Which Funds Had Heavy Holdings of Russian Debt?]( With Russian bonds and the ruble collapsing, these emerging-markets funds had big weights ahead of the invasion. Benjamin Slupecki [Which Funds Have the Biggest Russian Stock Holdings?]( Investors in these funds had the most exposure to Russia heading into the war. Benjamin Slupecki [Is ARK Innovation a Growth Fund or a Value Fund?]( Cathie Wood says ARKK is a “deep value” fund now. But Morningstar’s data shows it's still a growth fund, just with stocks that are struggling. Katherine Lynch [3 Sectors With the Largest Fair Value Increases]( While few companies’ fair value estimates increased, some sectors saw particularly strong gains. Jakir Hossain [Dividend-Stock Deep Dive: Energy Ideas]( 'It's pretty clear that the market wants to see this industry return capital to shareholders.' David Harrell, Dave Meats, CFA Listen Now Get the latest investing insights and market updates with [Morningstar’s podcasts]( available on your iPhone, iPad, Android, PC, or smart speaker. Stay connected: [twitter]( [facebook]( [linkedin]( [instagram]( [YouTube]( [Apple News]( [View online]( | [See all newsletters]( | [Share your feedback]( [Unsubscribe]( from this newsletter. Or update your [email preferences](. © 2022 Morningstar, Inc. All Rights Reserved. 22 W. Washington St. Chicago, IL 60602