Our favourite international equity funds

Note: This article is part of Morningstar's 2015 Global Equities Week special report.

Like most of us, I love to travel. Travelling to different parts of the world allows us to learn and experience different cultures and cuisines, and to have a litany of experiences that we could never otherwise have if we did not venture beyond our borders. Enjoying what the world has to offer doesn't mean we don't appreciate the virtues of our own country; it just means there's more out there than what's here at home.

When it comes to investing, however, it seems my fellow Canadians prefer to invest a large share of their portfolios in Canada, and this is likely not optimal. Canada accounts for just around 3% of the MSCI World Index as of November 2015, which means that investors are missing out on, literally, a world of opportunities. Investing abroad allows us to lessen some of the heavy exposure to commodities and financial services that is unique to the Canadian economy, and also to own some wonderful businesses that just happen to operate outside of Canada.

For investors seeking to round out their portfolios with foreign exposure, one avenue is to consider global equity funds, which can invest anywhere in the world. My colleague Christopher Davis outlines the pros and cons of this approach as well as our favourite options here. Another alternative is to choose among international equity funds, which exclude stocks from North America.

When making the choice of what international equity fund suits you best, make sure that, if choosing an active manager, the manager's style is one that that is appropriate for you. Compared to a passive ETF, active managers will also favour or avoid certain countries or regions, which is only good if they turn out to be right. Currency is another aspect to consider (we outlined the pros and cons of hedging in this article).

With that, here are some of our favourite international equity mutual funds, along with two ETF options. The funds have all earned positive Analyst ratings, meaning Morningstar analysts believe they're likely to outperform their benchmark and/or peers over a full market cycle. The ratings -- Gold, Silver and Bronze -- depend on the level of confidence analysts have in a fund's long-term prospects.

Mawer International Equity 

Managed by David Ragan, Morningstar's 2012 Foreign Equity Manager of the Year, this fund has used Mawer's quality-oriented investment philosophy, a thoughtful approach to portfolio construction and robust risk management to deliver strong returns to fundholders. Simply put, Mawer invests in firms with sustainable competitive advantages trading at a discount to intrinsic value, after rigorously vetting their theses. Valuations are a potential headwind: As low interest rates have pushed stock prices higher, Ragan would rather hold on to quality businesses, even if they're expensive, than sacrifice quality in a search for bargains. While this should pay off in the long term, there may be short-term pain along the way. Mawer does not hedge foreign currency exposure. Manulife World Investment Class -- which is rated Silver -- is a replica of this fund and is available to investors who make use of an advisor.

CI Black Creek International Equity  

Managed by Richard Jenkins, the freshly-minted winner of the 2015 Morningstar Foreign Equity Manager of the Year award, Black Creek's international equity offering is unique in the literal sense of the word: The manager's contrarian approach requires him to have a view on a stock that is meaningfully different from the one held by the wider market, resulting in a concentrated portfolio that looks quite different from the index or the average fund in the category. This approach is not without its risks; with a concentrated portfolio, poor stock choices can ruin a fund's near-term prospects, and risk management could be bulked up. Over the long-haul, however, the team has demonstrated its ability to add value. Jenkins has not yet hedged any currency exposure, but will do so in extreme cases.

Beutel Goodman International Equity  

Managed by K.C. Parker, this fund highlights the potential drawbacks of having a concentrated portfolio. It used to hold 25 to 30 names, but as a select number of holdings struggled over the past few years, Parker increased the number to 30 to 35. While the results don't look pretty, our confidence in Parker comes from Beutel's disciplined investment approach that looks for companies with strong free cash flows. Managers only buy when a stock trades at a 30% discount to its fair value. When their holdings reach fair value, they automatically sell a third of their position, limiting the risk of holding more expensive stocks. The team then gets a fresh set of eyes to reassess the stock; if the company's value hasn't increased, they'll sell the position outright. This process has led to outstanding protection on the downside on their other funds, and with the tweaks they've made to their approach on the international side we expect the approach to pay off over the long term.

PH&N Overseas Equity  

PH&N Investment Services, which is owned by RBC Global Asset Management, made a change to the subadvisor on this fund in August of 2014, switching from Sky Investment Counsel to its own team of 10 global specialists led by Habib Subjally, who also serves as head of global equities. The new managers take a more conservative approach than their predecessors, and are more willing to pay up for quality businesses if they believe these will benefit the portfolio. They also use quantitative tools to try to understand and measure the impact macroeconomic events have on the portfolio -- something Sky ignored. While their track record is too short to fairly judge performance, the multi-faceted approach increases the likelihood the fund will deliver superior returns than the benchmark or peers.

iShares Core MSCI EAFE IMI (XEF) (XFH)
Vanguard FTSE Developed Markets ex-North America (VDU) (VEF)

These ETFs are options for investors who would rather opt for passive, low-cost alternatives. They provide exposure to large- and mid-cap stocks domiciled in developed Europe, Asia and Australia. The iShares and Vanguard offerings attempt to track the MSCI EAFE and FTSE Developed Markets (ex-North America) indices, respectively.

Modelled after those benchmarks, stocks are not weighted by how well they're expected to do but rather by their market capitalization, or how big the stock is. Over half of their allocations are in Greater Europe (including the United Kingdom) along with a significant stake in Japan -- a country that has been traditionally hard for active managers to find stocks in due to various challenges such as shareholder transparency and massive government intervention in the financial markets.

Both ETFs were launched in 2013 and therefore have relatively short track records, but so far the iShares has done a better job of tracking the index. This is likely partly because the Vanguard ETF, with an MER of 0.26%, is slightly costlier than its iShares counterpart, which charges 0.22%. Both offerings come in hedged and unhedged form.