The Broad View on International Investments
“Buy American” sentiments seem to be gaining ground in today’s tough economic climate, and it’s probably only a matter of time before some presidential candidate declares that it’s unpatriotic to invest in an international mutual fund.
Financial advisers have noticed that some clients are reluctant to buy into foreign issues, particularly since President Bush’s trade-oriented trip to Japan last month. “A lot of my clients are older and had personal experiences in World War II,” says Jim Rapisarda, an investment adviser with Glass Financial in Phoenix. “Some figure that if they can keep their money here and keep more (Americans) at work, they’ll do it.”
In a narrow sense, it probably is unpatriotic to buy a stock or bond fund that invests in Japanese, German and other foreign securities. After all, the dollars you send to another country’s stock market make it easier for foreign corporations to raise capital which, in turn, can be used to buy factories and machinery that churn out products more cheaply than Americans can.
The same holds true for bond-fund investments, because dollars flowing to another market help reduce interest rates in that nation. “In a narrow sense, you would be taking money out of the U.S. for the possible benefit of another country,” concedes Norman Kurland, portfolio manager of the Boston-based Pioneer Europe Fund.
But in other respects, Americans who invest in international funds aren’t hurting their country and may even be doing it a favor, experts say. Here are some of the reasons why:
* International investing helps lower the dollar. Before an international fund manager can buy foreign stocks or bonds, he needs to convert dollars into pounds, yen or marks. On a large enough scale, this can help reduce the value of the dollar in relation to the other currencies.
It might seem perverse to want to see the dollar depreciate. Yet a cheaper greenback makes American goods more competitive and that would help U.S. exports and employment, notes Robert Solomon, a guest scholar specializing in international economics at the Brookings Institute in Washington.
* International investing helps make foreign nations more able to buy American goods. Even Japan, which enjoys a huge trade surplus with this country, is a big customer for many domestic corporations, purchasing more U.S. products than any nation except for Canada. “If your neighbor is richer, he can buy more from you,” Kurland says.
* International investing is a two-way street. Foreigners hold billions of dollars of U.S. stocks and bonds, helping prop up prices and reduce the cost of capital in domestic securities markets. If Washington somehow prevented Americans from investing in other countries, those nations might retaliate and order their citizens to pull out of U.S. markets, to the detriment of investors here.
* Profits from international investing will eventually be repatriated. When Americans invest in an international mutual fund, any capital gains they reap will return to the United States when the shares are sold--not to mention dividends collected along the way. Either result helps boost the U.S. capital base. “The worst argument you can make about Japanese investment in this country is that they’re sucking the profit out of U.S. companies,” Kurland says. “You could argue that you’re doing the same when you invest in a foreign fund.”
It’s also worth noting that most of the mutual fund management companies that run international portfolios for the benefit of American investors are based in this country. That means that the management or investment-advisory fee you pay stays in the United States.
If you don’t want to invest in a certain country or region of the globe, you can find a fund that narrows the field more to your liking. Most international funds primarily hold a combination of Western European and East Asian securities, but there are also European funds, Asian (Pacific Rim) funds and a handful of Latin American portfolios.
In addition, there are global funds, which can invest in both foreign and domestic securities, depending on market conditions.
Assuming that you don’t have a philosophical problem with international funds, there are some good reasons for holding them. For starters, you add diversification to your portfolio, because U.S. stock and bond markets rarely move exactly in sync with their overseas counterparts. Perhaps more important, you open yourself to a wider range of investment opportunities, with the potential for earning higher returns.
“Most people who invest in mutual funds are primarily concerned with making money,” Rapisarda notes. Especially when those profits can be called home at a moment’s notice.
Where Foreign Funds Invest
Mutual funds that focus on foreign stocks primarily invest in companies based in Western Europoe, Japan and elsewhere in the Pacific Rim. Pure international funds only buy shares traded outside the United States, while global portfolios hold a combination of foreign and American stocks.
Average Foreign Fund Holdings (including global funds):
Europe (primarily Britain, Germany, France): 42%
Japan: 21%
United States: 14%
Other Pacific Rim (primarily Australia, Hong Kong, Singapore): 13%
Other: 10%
Source: Morningstar Mutual Funds
World’s Leading Stock Markets (by total capitalization)
United States: 38%
Japan: 28%
Europe (excluding Britain): 17%
Britain: 11%
Other Pacific Rim: 4%
Other: 4%
Source: Morgan Stanley Capital International
