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The US equities have enjoyed another year of strong gains this year. The Dow, S&P 500 and the Nasdaq are up 8.9%, 13% and 15.1%, respectively so far this year. Bolstered by a firm domestic recovery, indexes have ignored international headwinds for most part of the year. An improvement in the employment situation led to the Fed ending its third round of bond buying.

However, it is quite a different story when it comes to international markets. There have been dependable growth stories such as China and India. Meanwhile, Prime Minister Shinzo Abe’s stimulus measures are being tested in Japan. Despite these factors, stocks in China and Japan have gained recently. Overall gains in these regions still lag the performance clocked in by the US markets. However, Indian benchmarks have recorded strong gains, outperforming the US markets.

We will be picking the top 3 non-US equity mutual funds this year based on their year-to-date returns and favorable Zacks Mutual Fund Rank among others. However, before doing so, let’s look at the positives for the sector.

Keep reading our Mutual Fund Commentary section, where we are reporting on performances and best picks from fund families and other categories.

YTD International Equity Funds’ Performance

International Equity Funds Return YTD (%) 1 Year (%) India Equity 39.47 40.81 Pacific/Asia ex-Japan Stk 5.13 6.32 World Stock 3.9 4.8 Diversified Pacific/Asia 0.82 2.06 China Region -0.34 1.03 Japan Stock -1.89 -0.46 Foreign Large Growth -2.68 -1.35 Diversified Emerging Mkts -3.1 -2.06 Foreign Large Blend -3.72 -2.55 Foreign Small/Mid Blend -4.39 -2.95 Foreign Large Value -4.91 -3.78 Foreign Small/Mid Growth -4.91 -3.44 Europe Stock -6.07 -4.75 Foreign Small/Mid Value -6.2 -4.85 Miscellaneous Region -7.45 -6.52 Latin America Stock -13.27 -12.36 Source: Morningstar, Returns as of Dec 26

International Headwinds

From the very beginning of the year, geopolitical tensions looked threatening as the Russia-Ukraine crisis led to standoff with the Western countries and sanctions were imposed on Russia. Violence in the Middle East followed later, intensifying the political concerns. Election turmoil in Greece was also a headwind earlier this year. Meanwhile, key economies like China and the Eurozone have disappointed investor sentiment on many occasions because of their dismal economic reports. Japan too has failed to cheer investor mood as it entered into a technical recession.

Eurozone Struggles: Data coming in from this part of the world has been intermittently worrying. For instance, earlier this month, industrial output in Germany expanded 0.2% in October, less than analysts’ expectation of a rise by 0.3%. Previous months’ data was also revised lower to growth of 1.1% from 1.4%.

Following a recent meeting, the ECB President Mario Draghi indicated that the ECB may consider additional monetary stimulus in the Eurozone to revive the economy. However, he also added that monetary expansion may be provided by early 2015.

China’s Challenges: China continues to face its own set of challenges. On Nov 21, the People’s Bank of China (PBOC) decreased the one-year benchmark lending rate by 40 basis points to 5.6%. This is the first reduction in rates undertaken in more than two years.

The move to reduce rates has come after several economic reports indicated weakness in the economy. Dismal manufacturing data and a slump in the real estate sector meant that the GDP growth target looked increasingly unattainable.

Japan’s Jitters: Japan’s economy contracted for the second successive quarter, surprising economists and market watchers. GDP declined 1.6% in the Jul-Sep period, following a contraction in the second quarter. Second quarter’s contraction was revised from the earlier estimate of 7.1%, to a marginally worse number of 7.3%. This was possibly a result of a hike in consumption tax in April from 5% to 8%.

Best Performing Non-US Mutual Funds

Given the struggles of markets across the world, it may seem only the U.S. markets have emerged unscathed in 2014.

However, there are economies that have seen strong gains for their benchmarks. Despite China’s economic challenges, the benchmark Shanghai Composite has gained over 40% year to date. As for India, their benchmarks S&P BSE SENSEX and CNX NIFTY are up 28.9% and 30.1% year to date, respectively. (Read: Stay Invested in India Mutual Funds on Bullish Growth Expectations)

Consequently, certain international regions present good investment alternatives. This is why we offer three alternatives from across the world, each of which has a good Zacks Rank.

We will pick 3 top non-US equity mutual funds that carry a Zacks Mutual Fund Rank #1 (Strong Buy) as we expect the funds to outperform its peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund.

These funds also have high returns year to date. The funds have relatively low expense ratio and carry no sales load. The maximum initial investment required for these funds is $5000.

Matthews India Investor (MINDX) seeks capital growth over the long term. The fund invests a lion’s share of its assets in stocks and convertible securities of firms based in India. Though the fund invests in companies of all sizes, the adviser expects the fund to invest in mid to large-cap companies.

The fund has returned 59.4% year to date. The fund has an expense ratio of 1.13% as compared to category average of 1.72%.

Matthews Pacific Tiger Investor (MAPTX) invests most of its assets in companies located in Asia excluding Japan. The fund may invest in companies of all sizes but expects them to be of mid to large size. The fund focuses on companies with sustainable growth potential based on fundamental aspects like balance sheet, size and cash flow stability.

The fund has returned 11.1% year to date. The fund has an expense ratio of 1.09% as compared to category average of 1.63%.

T. Rowe Price Africa & Middle East (TRAMX) seeks capital appreciation by investing in companies from Africa and the Middle East. The non-diversified fund invests taking into consideration outlook for industry sectors and individual countries. The fund manager emphasizes bottom-up stock selection.

The fund has returned 9.2% year to date. The fund has an expense ratio of 1.42% as compared to category average of 1.83%.

About Zacks Mutual Fund Rank

By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Learn more about the Zacks Mutual Fund Rank in our Mutual Fund Center.

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