The best investment bets abroad
The recent global selloff provides a fresh opportunity to diversify your portfolio internationally.
(Fortune Magazine) -- For years American investors were notorious stay-at-homes, resisting the advice of investment strategists to diversify globally. But over the past 18 months, that's been changing.
Last year Americans put more money into foreign-stock funds than into domestic ones for the first time ever, according to the Investment Company Institute. And from January to May of this year, investors have been doubling down overseas, funneling $89 billion into international-stock funds, nearly three times what was invested in domestic-focused funds.
Some of those investors may have wished they'd stayed home. Since the beginning of May, the EAFE has dropped 6% and the emerging-markets index is down 11%, while the S&P 500 is down only 2%.
With risk, diversify
Stuart Ritter, a T. Rowe Price financial planner, says that short-term volatility is no reason to panic. "Don't let what has happened in the recent past delay your making a good decision for your long-term future," says Ritter. "Adding an international component of stocks to your portfolio can actually lower the risk you are taking." He recommends allocating 15% of your equity investments to international stocks.
One lesson from the recent meltdown is to avoid throwing money at whatever region happens to be hot. Instead, stick with a broadly diversified fund, light on expenses and heavy on knowledgeable management. We found four funds that fit the bill.
Manager Benjamin Segal invests in growth companies of all sizes in developed and emerging markets. With a modest $1.8 billion in assets to deploy, he can be choosy, pursuing a bottom-up strategy that emphasizes strong companies over strong economies. He isn't interested in highfliers, but rather looks for sustainable growth rates of 5% to 10% in sales and 10% to 15% in profits. The result is an eclectic portfolio.
Almost a quarter of the fund is in consumer discretionary stocks, like the giant Belgian brewer InBev, maker of Beck's and Stella Artois. Energy and financials account for about another 40%. Since taking over the fund in late 2000, Segal has returned an average of 16% annually, beating the EAFE index by six percentage points.
Segal says that while the markets have fallen, fundamentals haven't changed much. "Unless you believe the world is going to hell in a handbasket, there really is significant value emerging," he says. Segal has been seeing so many opportunities that the fund, which has had nearly 10% in cash at times over the past year, is now fully invested. "At these levels, we are more and more excited about the stocks we like," he says.
Hakan Castegren has been running this fund since its inception nearly 20 years ago. In that time it has returned an average of almost 15% annually, vs. 6.7% for the EAFE. Castegren focuses on large-cap companies primarily in developed countries, including Japan, Britain, and France.
Among his largest holdings are Swiss industrial conglomerate ABB (Charts); BHP Billiton (Charts), an Australian mining company; and Petrol Brasileiros, the big Brazilian oil company. In a recent shareholder letter, he described the cautious approach that has served him so well over the years: "We've been pretty heavy in metals and minerals," he wrote. "We have avoided lower-quality emerging markets like Egypt, Turkey, Indonesia, Pakistan, places like that. They have done very well.... But I'm afraid it's all been speculation. So we stay with the fairly conservative stuff."
American Funds has a formula that is familiar to many investors, with a team of proven managers dividing and conquering huge funds. The company's EuroPacific Growth is a mega - mutual fund with more than $80 billion in assets and a track record that speaks for itself: an annualized return of 13.5% since 1984. The fund is big on commercial banks and pharmaceuticals.
Investors looking for the lowest fees and the broadest diversification can do no better than this reliable index fund, which tracks the Total International Composite index, a combination of several developing and emerging-market indexes.
"There is the notion that index funds don't work overseas," says Morningstar analyst Dan Lefkovitz, "but this fund has great performance and combines developed markets and emerging markets, and its rock-bottom expense ratio is an advantage." It has an average return of more than 6% annually since 1996.
From the July 24, 2006 issue