‘EXPAND YOUR INVESTMENT FRONTIERS,’ in the Wall St. Journal. Making investments overseas.

In Uncategorized on January 15, 2010 at 13:59

Expand your investment frontiers


The global financial crisis rattled investors world-wide. One thing the crisis didn’t do: diminish the importance of investing overseas.

During the past 25 years, money in international stock mutual funds has doubled to account for 10% of the fund industry’s roughly $11 trillion in assets under management. The younger (and smaller) exchange-traded-fund sector has an even stronger global flavor.

The rising role of international funds comes amid much short-term debate about how the global economic recovery will unfold. A number of analysts believe the U.S. is well positioned to outperform other major economies in 2010.

In recent weeks, the dollar has shown more perk, surprising the greenback grinches.

Currency is a key element in international investing. If the dollar is declining, investors in overseas funds get a dollar “kicker” when profits are translated back into dollars. Conversely, a rising dollar will undercut gains made overseas. Some mutual funds hedge against currency moves, but most do not.

As a long-term investor, it’s important not to get caught up in the daily debates about currency and market direction. The U.S. may have a good year, the dollar could rally for months.

Rising economies, falling dollars

But what does the long view look like? By most accounts, globalization will lift profits outside the U.S. at a faster rate than inside the U.S. While the U.S. economy will remain the largest in the world for some time to come, other economies, notably China, Brazil and India, keep gaining ground. In addition, the dollar is expected to weaken over the long term as global imbalances get ironed out.

U.S.-centric investors are bemoaning a lost decade. According to Bank of America Merrill Lynch (BAC, $100 invested in the Standard & Poor’s 500-stock index  on Dec. 31, 1999, would have been worth $91 a decade later.

Emerging markets? The same investment exercise would have created a value of $262 a decade later.

According to Lipper, the top mutual funds over the 10 years through 2009 are dominated by two groups: gold-centric funds and international funds with a focus on Asia and Latin America.

Back in the early 1980s, international funds still had a novelty value, and most financial planners didn’t recommend much exposure to the group. Today, financial planners generally recommend that around 10% of stock mutual-fund assets be held in international funds, with some recommending even higher levels.

It’s important to note a key dividing line in international funds. Some funds focus on developed economies, such as Western Europe, Japan, Canada and Australia. Among the best performing funds in this group are the Henderson European Focus fund (HFEAX | Get Prospectus), which had an annualized gain of 10.6% over the past five years. The Oppenheimer Global Opportunities fund (OPGIX |, which invests in both U.S. and non-U.S. companies, had a five-year annualized return of 6.6% and a 10-year annualized return of 5.1%. (All fund data are from Lipper.)

Other funds focus on emerging markets, the most famous of recent vintage being the BRICs, or Brazil, Russia, India and China. Top funds focused on this area include T. Rowe Price Latin America (PRLAX |, which has a five-year annualized return of 27.9% and a 10-year annualized return of 18.4%, and Templeton China World (TACWX | Get Prospectus), which has a five-year annualized return of 17.1% and a 10-year annualized return of 15.9%. (Be careful. It’s almost impossible to sustain such over-the-top returns for extended periods.)

International funds that invest in developed economies have lower risk, and, thus, usually a lower return over the long term. International funds focused on emerging markets are riskier, and emerging-markets funds focused on a single country are riskiest of all — but also potentially the most rewarding. Colombia had a total return over the past decade of 1,529%, according to MSCI. The ING Russia fund (LETRX | had a one-year gain of 129% in 2009.

So, why not just plow everything into the international realm? In a word: risk.

Investing overseas, especially in emerging markets, entails more risk than investing at home. Emerging markets as a group rose a whopping 73% last year, according to Bank of America Merrill Lynch. But that still left the group 36% below highs reached in October 2007.

Currency and debt concerns

Moreover, there’s the risk of currency fluctuation as well as the risk of political problems. The recent government-debt problems in Greece, Ireland and Dubai underscore how complex global investing can be.

Another reason not to go overboard on international funds: U.S.-focused funds already provide substantial exposure to overseas markets without the same level of political or currency risk. The 30 companies in the Dow Jones Industrial Average (.DJI, such as Boeing (BA, Coca-Cola (KO and General Electric (GE, do enormous business outside the U.S.

Taking the long view, it’s very likely that the trend of the past 25 years — the rising importance of non-U.S. markets — will continue. Long-term investors would be wise to have decent exposure to that trend in their portfolios.

Copyright © 2010 Dow Jones & Company, Inc. All Rights Reserved.


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