At first blush Scout International (UMBWX) appears to be a fairly typical international fund, but what sets this offering apart from the crowd is where management doesn’t invest. Ivy League-educated lead manager Jim Moffett has conspicuously avoided the Chinese market for years. Believing that shareholder protections in China are too weak, Moffett remained on the sideline during the bull market rally in 2006 and 2007; although the fund returned more than 21 percent in 2006, it subsequently fell to near the bottom of its category while competitors reaped the gains.

But Moffett’s skepticism paid dividends in 2008 when the Shanghai Index plunged a gut-wrenching 65 percent. Although Scout International lost just over 38 percent that year, it finished 2008 in the top 6 percent of its category. It also beat its benchmark, the MSCI EAFE Index, by a respectable 5.9 percent.

The fund was helped by its light exposure to financials in 2008 as well as Moffett’s decision to overweight consumer staples. However, it did have one notable blowup in the banking sector, hanging on to Anglo Irish Bank Corp (OTC: AGIBY) as share prices plunged amid steep loan losses.

We expect the fund’s performance to hold up, especially given Moffett’s top-down approach to stock selection. He and his team first examine the macroeconomic climate as well as the political situations in the countries in which the fund invests, and then disqualify any companies younger than three years old.

Moffett also has the option to invest as much as 20 percent of assets in fixed-income securities such as bonds or preferreds, though he rarely exercises it.

His aversion to China could be a drag on returns this year–more than half of the portfolio’s assets are invested in Europe–you’d be hard-pressed to find a better-managed international fund. Boasting an expense ratio of just 0.96 percent, Scout International makes an excellent long-term holding.

Technically a growth and income fund, Scout Stock (UMBSX) has emphasized growth as of late and currently yields just over 1 percent. But former attorney and lead manager James Reed has a history of generating healthy returns without hefty yields; during the fund’s best years, the income component played a minor role in overall performance.

By overweighting health care and consumer goods and underweighting financials versus its historical norms, Scout Stock finished 2008 in the top 3 percent of the large-blend pack. It also held historically large stakes in Microsoft (NSDQ: MSFT), Oracle (NSDQ: ORCL) and other software companies.

On a year-to-date basis the fund is underperforming its benchmark, the S&P 500, by about 7 percent, but that’s primarily because of its limited exposure to the aggressive rally we’ve seen in small-cap stocks. But given Reed’s combination of top-down and bottom-up approaches–top-down to identify attractive sectors, bottom-up to select individual companies–the fund is a perfect option for more conservative investors.

Some brokers may have trouble finding Scout funds. Prior to June 30, 2009 the funds were known as “UMB Scout” because the funds’ management company was a part of UMB Bank

(NSDQ: UMBF). After the reorganization, the fund management company is now a subsidiary of the bank holding company rather than the bank itself. The restructured entity offers an added layer of protection for fund investors in the unlikely event of problems at UMB Bank.

The funds will maintain their current ticker symbols, but there may be some confusion with brokers until distribution agreements are updated. That shouldn’t deter potential investors; no changes are being made to the manager lineup.

WHY TO BUY
SCOUT FUNDS
• Extremely low expense ratios relative to other small funds
• Conservative management
• Slow but steady returns