‘DON’T GIVE UP ON EUROPE,’ by Michael Pollock & Karen Damato, Wall St. Journal.

In Uncategorized on June 10, 2010 at 04:39

Don’t give up on Europe


Amid worries about the tumbling euro, here are seven reasons not to dump foreign-stock funds.

Thanks to the European debt crisis, international stocks have gotten a lot scarier for U.S. investors in recent months.

So if you own a stock fund with exposure to Europe, is this the time to pull out?

No, insist many investment professionals. These investors and analysts argue that the 16% drop in the euro versus the dollar so far this year has already pummeled the value of European stocks for U.S. investors, and events so far don’t point to another global financial debacle. Assuming Europe can maintain its common currency, some even argue that the euro’s drop will bolster exports for European companies, making their depressed shares potentially attractive to people who have a multiyear investment horizon and can afford to be patient.

Global markets have sagged on fears that European Union nations such as Greece and Portugal might be unable to repay debt, and that the euro, the common currency for 16 nations in the union, could collapse as a result. Efforts to control the crisis have included a bailout totaling nearly $1 trillion pledged by various European nations and the International Monetary Fund, a multilateral institution that aids countries in financial straits.

David Antonelli, head of global equities investment at Boston-based MFS Investment Management, believes the recent actions will damp the default fears. “Our view is that this isn’t going to be one of those shocks that completely spirals out of control and results perhaps in a breaking up of the European Union or the end of the euro,” he says.

Other observers are less sanguine about how the situation in Europe will play out.

Still, here are seven reasons most fund investors in the U.S. probably shouldn’t make dramatic moves to lighten their holdings of international-stock funds.

Your active manager is on the case. If you hold actively managed funds—such as diversified international- or global-stock funds—your fund managers may have already tweaked their holdings in response to the changing environment.

“That’s why you hire an active manager: You believe you are hiring a brain that is on the scene to manage through difficult environments,” says Lane Jones, chief investment officer for advisers Evensky & Katz in Coral Gables, Fla.

You typically can’t find out exactly how your money is invested currently in an actively managed fund. But many fund managers have been trimming some stock holdings and shifting money around.

Keith Walter, who oversees about $1 billion in mutual funds and other accounts at New York-based Artio Global Investors Inc., has cut European exposure by more than six percentage points recently in favor of various other regions.

Within Europe, he sold shares of banking companies in Italy, France and Britain that are dependent on local markets, while purchasing shares of European truck makers and other industrial companies with export-focused businesses. “We aren’t abandoning Europe,” Mr. Walter says. “We still think there are some good opportunities there.”

Timing the markets is notoriously tough. Do you really think you can predict the course of stock markets and foreign-exchange rates, challenges that stymie even the pros?

Even temporarily pulling out of a stock fund until the dust clears may be a mistake, says Jeff Applegate, chief investment officer at Morgan Stanley Smith Barney. You could end up having to buy back in at a higher price than you got on the sale.

If you feel you must do something, keep in mind that many pros usually make only incremental changes in their allocations. They don’t suddenly eliminate big positions, says Alec Young, a stock strategist with Standard & Poor’s. For instance, in early May, S&P trimmed to 60% from 65% the combined U.S.- and international-stock exposure in a model global portfolio for moderate-risk investors.

Remember rebalancing. Many investment pros say the best strategy for investors is to make a plan for how you want your money spread among various asset classes and to periodically rebalance to that target mix. That helps you to sell high and buy low, even though it’s no fun to sell winners and it’s scary to buy securities that have been battered.

If you regularly rebalance, recent market trends could have you buying international-stock funds—or Europe-focused funds, if such regional exposure is part of your plan.

That’s been the case for some accounts managed by Rick Ferri of Portfolio Solutions LLC in Troy, Mich. His target for clients’ foreign-stock holdings: 40% in Europe, 40% in the Pacific Rim and 20% in emerging markets. For Europe, he uses Vanguard European ETF .

The lines between funds are blurring. In an increasingly global financial world, there is more overlap and more similar performance between U.S.-stock and international-stock funds than some investors may realize. So while you may be tempted to move a chunk of your portfolio from an internationally focused fund to a U.S.-focused one, that might not change your overall investment exposure as much as you think.

“There is still a tendency by investors and advisers to look at domestic and international [stock funds] as two separate buckets,” says Jeff Tjornehoj, a research manager with Lipper Inc. But “the amount that you hold in international [versus] domestic makes less difference on average than it did several years ago.”

For instance, the domestically focused Dodge & Cox Stock (DODGX | recently had 19% of assets in foreign-domiciled companies, while Janus Overseas (JDIAX | Get Prospectus) recently had 24% in U.S.-based companies, notes Todd Rosenbluth, an analyst at S&P.

There is an overlapping effect even for index funds that hold only foreign-based or only U.S.-based companies: Most larger companies do a lot of business beyond their home countries, so they are dependent on economic activity around the globe.

Returns on U.S.- and international-stock funds can still diverge dramatically at times, in part because of currency swings. So far this year, funds holding “large blend” stocks in the U.S. are down 4.2%, according to Morningstar Inc., while foreign large-blend funds are down 13%. But U.S.-stock and international-stock indexes generally tend to rise or fall together, says Mr. Tjornehoj of Lipper.

Currency exposure can be a good thing. This year’s tumble in the euro has highlighted the risk of holding shares denominated in foreign currencies.

The falling euro is a major reason the MSCI Europe index  is down 7.1% in local currencies, but down 19% for U.S. investors who must convert their overseas holdings into dollars. And recent worries about whether the euro will survive means “this isn’t your run-of-the-mill currency risk,” says Mr. Young of S&P.

But investors should remember that currency trends change frequently and unpredictably. Last year, the falling dollar boosted the returns of foreign-stock funds for U.S. investors.

Many financial advisers see currency diversification as a smart defensive strategy for investors over time.

Currency effects are complex. Some fund managers believe that the slide in the euro could give a big boost to individual European stocks and hurt certain U.S. stocks.

A weaker euro means European companies that get a major portion of their sales outside Europe will become much more globally price-competitive, says Cindy Sweeting, director of portfolio management for Frankin Resources Inc.’s Templeton Global Equity Group, which oversees about $100 billion.

For example, big German companies such as the conglomerate Siemens AG  and software giant SAP AG  could benefit considerably from currency movements, she says.

But some large U.S. companies may be hurt by Europe’s problems, despite the more robust performance expected by the U.S. economy.

U.S. makers of computer equipment, for example, may have dollar-based costs that will remain steady or rise while their revenue from overseas sales in local currencies falls, says Richard Parower, who manages Seligman Global Technology (SHGTX |.

Most of us are biased. Investors tend to have “home-country bias,” meaning we load up on shares of companies based within our national borders. It’s common for U.S. investors to have most of their stock holdings in U.S. companies—even though U.S. shares account for less than half of the global market capitalization.

Rather than trimming overseas exposure, some advisers say investors should think about investing in proportion to the market value of stocks around the world.

Jason Thomas, chief investment officer at advisers Aspiriant in Los Angeles, says an easy way to get that global market-weighted exposure would be to put your stock dollars solely in iShares MSCI ACWI Index , a low-cost exchange-traded fund which tracks the MSCI All Country World Index.

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


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