Good Time to Get on Board in Foreign Markets
It looks like the current bull market in stocks will turn out to be a global one after all.
Markets from Germany to Hong Kong are rallying this year, boosting enthusiasm for mutual funds that invest around the world.
“We’re seeing renewed cash inflows following 1995, which was pretty flat,” says Carl Wittnebert, managing editor of Mutual Fund Trim Tabs, a newsletter in Santa Rosa, Calif., that tracks industry cash flows.
For investors who have focused their stock-market holdings in domestic funds, now might be a good time to consider putting some cash, or more cash, into foreign portfolios.
“If you missed the rally in the U.S., you still have a chance to get on board abroad,” says Michael Perelstein, co-manager of four MainStay international funds in New York.
Foreign portfolios look tempting for any of several reasons.
For starters, anyone interested in broad diversification should consider some international holdings. Foreign markets weigh in with roughly two-thirds of the world’s stock values today--nearly double the proportion of a generation ago. That means only a third of today’s opportunities are in the U.S.
Plus, international investing provides access to companies in fast-growing regions of the world such as Southeast Asia.
“The reason Americans should invest abroad is to avail themselves of growth not available at home,” says Anthony Cragg, manager of the Strong International Fund in Milwaukee.
As a bonus, many foreign markets offer better bargains than what’s available on Wall Street these days.
“For the first time in many years, U.S. stocks are selling at the highest price-to-book value ratios of the 22 major markets,” Perelstein says.
The U.S. logged the best performance of those 22 stock markets in 1995 with a surge of 37%, including dividends. Most of the other 21 nations also enjoyed rising stock prices, but the median advance was a gain of only 15%.
Owing to sluggish economies abroad, Perelstein figures that interest rate cuts are more likely in many foreign nations than here, especially in key European countries.
“The interest rate environment abroad is very positive,” he says.
European and Japanese companies have lagged their American counterparts in terms of the number and scale of corporate restructurings, which presents opportunities for future profit improvements.
Switzerland Bank’s Julius Baer estimates the U.S. will enjoy the lowest profit growth this year of 12 key nations studied. It sees substantially higher growth rates in France, Japan and Germany.
Mutual funds make good choices for building an international stake for reasons relating to professional management, diversification and the difficulty of researching and trading individual foreign stocks. Nearly all fund groups now have at least one foreign portfolio.
But before buying anything international, you should estimate the percentage of foreign holdings among the U.S. stock portfolios you already own.
Most such funds can and do invest in foreign companies, especially multinationals. The average U.S. growth portfolio, for instance, has a 6% foreign stake, estimates Morningstar Inc. of Chicago.
But some funds take much larger positions from time to time. For instance, Fidelity Capital Appreciation at last count had 47% of its assets abroad. Funds that make major shifts between U.S. and foreign stocks need to be watched closely.
You can call the fund’s toll-free number or check the most recent annual report for the foreign-stock breakdown. Research publications such as Morningstar Mutual Funds of Chicago and the New York-based Value Line Mutual Fund Investment Survey also track this information.
Next, you should decide on an appropriate allocation or weighting of international funds in your portfolio. Cragg advises putting 20% to 40% of your stock market money into foreign shares, depending on your age, risk tolerance and other factors.
Step 3 involves splitting your foreign weighting among emerging and developed nations.
“If you’re interested in growth, this will lead you to the younger markets in developing countries,” Cragg says.
But Perelstein recommends that mainstream investors favor stocks in the developed nations of Europe and Japan. While emerging countries may offer faster growth rates, their economies are more closely linked to the U.S. in terms of interest rates, currencies and other factors. Thus, the developed foreign markets offer better diversification.
While the prospects for international funds and markets now look brighter than they have appeared in a while, Cragg cautions investors against trying to time their moves.
“You see these dramatic cash inflows and outflows, which imply the wrong attitudes toward international investing,” Cragg says. “You should regard these investments as a permanent part of your portfolio.”
*
Oppenheimer Management Corp. of New York has changed its name to OppenheimerFunds Inc. The move is designed to reduce confusion with unaffiliated financial companies that share the Oppenheimer name.
OppenheimerFunds counts assets of $45 billion spread among roughly 45 portfolios.
*
The Berger 101 Fund of Denver has been renamed the Berger Growth & Income Fund in a move designed to minimize confusion with the sibling Berger 100 Fund.
Separately, the Berger group raised the minimum investment for all of its portfolios to $500 from $250.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Going Abroad
Americans have boosted their ownership of foreign-stock mutual funds. Below are the percentages of assets in three key stock fund categories. Global funds maintain holdings in U.S. and foreign stocks.
*--*
1990 1995 U.S. Stock Funds 88.5% 83.5% Global Funds 5.6% 5.6% International Funds 6.0% 11.0%
*--*
Source: Lipper Analytical Services
