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The cash flows for mutual funds tells this story: people are favoring international investments over domestic equity investments. Now, a good chunk of those international investments happen to be in bonds where yields are marginally better and currency hedging is done with ease and simplicity (a lot of investors do not even know it is going on in the first place).

Where the rest of that international investment money is going is into equities, most often into emerging markets equities. Countries like India and China have a great deal of appeal for a lot of people who are throwing money at emerging markets funds. But this may not be such a wise move. With growing evidence pointing at domestic equities as the best place to invest, forfeiting North American equity exposure could have disastrous impacts.

Forfeiting North American Equity Exposure… Disastrous

That is where the Artisan International Value Fund (ARTKX) can help. This international fund invests 100% in developed countries. Like ours. Like the UK. Like Europe. With roughly 2/3 invested in North America, it makes sense to look at this value fund as a 2011 holding.

Here is why. Its greatest sector weighting at this moment is Financial Services (at 22% of assets). This is overweight compared to its peers. Yes, financial services is an area of concern for a lot (including us here at the Mutual Fund Site) but there is a lot of promise for this sector. In fact, it has been one of the unloved sectors that will win by default once the economy starts turning around. But we will touch on this more in a bit…

The second largest sector weight is Business Services (at 19% of assets), again overweight compared to its peers. The third largest is Industrial Materials at 15% of holdings, underweight compared to its peers. Wait a second, isn’t this backwards compared to all of the other funds we have looked at recently?

Yes, this fund has taken something of a contrarian approach to what a lot of other mutual funds hold (with the exception of its Financial Services position, which is not so clear-cut with others we have reviewed). Here is why their sector weighting matters so much.

Winning Financial Services Firms – Double-Digit Returns!

Foreign financial services firms have done quite well. Lloyds Banking Group, which represents 1.82% of the portfolio has contributed +48% in gains to the mutual fund; the fund’s top holding, Experian PLC is also considered a financial services firm by Morninstar but is more of a services firm as it is the UK’s version of Trans Union or Equifax, is a 5.36% holdings and has contributed roughly 13% on a YTD basis. Experian also has a dividend yield of roughly 2.75% and continues to increse profitability. The mutual fund continues to add to this position, increasing exposure by almost 15% recently.

With just 44 shares outstanding in this tightly managed international equity fund, the top holdings represent a large reason for its success or lack thereof.

Panalpina Welttransport – 3.23% of holdings – 65% YTD Return!

Top business services holding, Panalpina Welttransport (at 3.23% of assets) provides end-to-end transportation services (a freight company, practically) and has returned 65% on a YTD basis. A tremendous gain. The company maintains a strong equity position and is positioned to profit from a recovery in the global economy (it has offices throughout the world although it is based in Switzerland). Artisan continues to add to this position and recently increased its exposure by 10%.

Tyco Electronics – 3.73% of assets

Although not part of the top sector groups, Tyco Electronics represents one of this value fund’s Top 10 holdings at 3.73% of assets. With a 20.5% YTD return, it is easy to understand why… yet this is a domestic equity! This holding will indirectly benefit from a lot of the merger and acquisition activity that this sector has seen, namely HP’s acquisition of 3Par, Intel’s acquisition of McAfee, and so on. Artisan has added to this position recently as well, although at a 3.4%, its increasing exposure here has been muted compared to its foreign holdings.

Should You Buy This Fund?

This is a large cap value fund. Its international scope makes it extremely attractive. Its YTD returns remain negative at 2.21 (which is better than its peers by 5.7%) might not be all that appealing. But consider that 2008 saw a loss of just 30.11% (more than 13% better than MSCI EAFE index and 17% better than its peers) and it makes sense why this is considered a low-risk, above-average return fund. (These are Morningstar’s ratings).

So far this year, the fund ranks 68th compared to its peer group, one of the worst rankings it has received (next to placing 95th in 2005 where it returned 10% for the year). With 3 top 10 rankings between 2003 and 2008, it makes a lot of sense why one would find this mutual fund so appealing. That is our justification for liking it.

As for individual investors, looking at this mutual fund as an alternate to holding pure domestic equity funds is not a bad thing. It provides the returns that many foreign markets have already enjoyed and it also appears properly positioned to profit from a recovering economy. The top 10 holdings tell us as much, as seen by the sample we picked and reviewed above. This is a solid fund with a solid track record, definitely worth considering for inclusion in your investment portfolio.