U.S. Investors Sound Retreat From Foreign Stock Funds
Unnerved by severe losses in Asian markets, U.S. investors are fleeing foreign stock mutual funds at the fastest pace since 1990, new data show.
Perhaps more important, the plunge in Asian stock values this year, which now is infecting other markets worldwide, has forced many investment advisors to revive an old debate: Is foreign investing even worth the trouble and risk for Americans, many of whom have embraced the concept only in recent years?
Encouraged by Wall Street’s admonishments about the need for global portfolio diversification, investors have since 1992 rushed into mutual funds that invest specifically in foreign issues.
Many 401(k) retirement savings plans have added a bevy of foreign-fund options in the 1990s, making it easy for even the smallest investors to send their retirement monies to far-off lands.
Such globe-hopping money managers as Mark Mobius, an investment manager for the Templeton mutual funds, have become well-known personalities in the financial media.
Yet even before the Asian market debacle, the past decade “hasn’t been wildly in favor of foreign investing,” concedes John Markese, president of the American Assn. of Individual Investors in Chicago.
In recent weeks, some individual investors have decided that owning foreign stocks isn’t for them, after all.
International stock mutual funds have suffered net redemptions of $2.2 billion in October, according to Trim Tabs Financial Services of Santa Rosa, Calif., a fund tracking service. That marks the first time since December 1990--immediately before the Persian Gulf War--that money has fled international funds over a full one-month period, Trim Tabs said.
The redemptions in foreign funds can clearly be traced to Asia’s economic and market woes, which began with Thailand’s devaluation of its currency on July 2 and have since ballooned into a regionwide crisis.
Thailand’s stock market has lost a stunning 46% of its value year-to-date, and the decline is far worse in U.S. dollar terms because of the currency devaluation: American investors in Thai stocks have lost two-thirds of their money, on average.
Likewise, in dollar terms Malaysia’s market is down 61% this year, and the Indonesian market has crashed by 49%.
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By contrast, even with this week’s turmoil, U.S. blue-chip stock indexes still are up 22% year-to-date.
The sharp declines in Southeast Asian markets, and this week in Latin American markets, have pummeled many international mutual funds that own stocks in the regions. The average international stock fund was up 12.5% for the year as of June 30, but has surrendered nearly half of that gain as of Thursday, according to fund-tracker Lipper Analytical Services.
For funds that invest specifically in Asia, the numbers naturally are far worse. T. Rowe Price’s New Asia fund has tumbled 36% this year. Merrill Lynch’s Emerging Tigers fund is down 45%.
Of course, most Americans who own foreign stocks or foreign stock funds do so in relative moderation. The total assets of all foreign stock funds were $328 billion as of Sept. 30, or one-fifth the $1.57 trillion that Americans owned in domestic stock funds, according to Lipper.
Still, it has become gospel within the financial planning profession in the 1990s that U.S. small investors should have a significant percentage of their stock portfolios, including any savings plans such as 401(k)s, in foreign funds--from 10% to 30% of the total, generally.
Some planners recommend even greater investments in foreign stocks. Los Angeles financial planner Percy Bolton, for example, says some of his clients have almost as much in foreign funds as they do in domestic funds.
“I believe that over the next five years, a lot of people are going to be disappointed that they didn’t position more money internationally,” Bolton said.
But measured over the past five, 10 and even 20 years, foreign investing has delivered returns far below what U.S. stocks have returned, experts concede:
* The average annualized return on general U.S. stock funds in the five years ended Sept. 30 was 19.2%, according to Lipper Analytical. Foreign funds, by contrast, earned 14% a year in that period.
* Over the past 20 years--probably a period as long as many “long-term” investors can expect to focus on--U.S. funds’ annualized return has been 16.3%, versus 13.9% for foreign funds.
Given compounding, the differences in the returns would have made a huge difference in the sum of savings that would have been accumulated between the two types of funds.
Which is why many financial planners admit they frequently face questions from clients, who wonder why they should be settling for subpar returns from foreign stocks as opposed to simply keeping all of their money in U.S. stocks.
“There certainly has been a lot of discussion in our office in the last week” on that subject, said Laura Tarbox, head of planning firm Tarbox Equity in Newport Beach.
Even investors who aren’t selling seem wary about buying more foreign funds.
“I have some global mutual funds and I held on [to] even though they made a drop” in recent weeks, said Leonard Levy, 83, a retired elementary school teacher in Murietta who has money in two Merrill Lynch foreign funds. “They’ll be back up. But I won’t buy more at this time--we don’t have time to speculate.”
U.S. stocks, after all, may be subject to the same risks of swings in the economy and in interest rates as foreign stocks. But U.S. stocks don’t face two of the biggest risks of foreign equities: currency devaluations, such as Southeast Asia’s; and severe political turmoil, such as the overthrow of a country’s government.
What’s more, investors who own U.S. blue-chip multinational stocks, such as a Coca-Cola or General Electric, can argue that they get plenty of “international exposure” in those companies, which may derive a third or much more of their sales from overseas.
Yet many investment pros insist that diversifying a portfolio with foreign stocks still is a critical element of good investing. Some point to the basic fact that foreign stocks now account for nearly two-thirds of all the stocks in the world--and thus, in theory, two-thirds of the available equity opportunities.
Others note that academic studies have shown that foreign stocks, despite lower overall returns over the past decade, reduced the total volatility that an investor experienced in a diversified portfolio, precisely because U.S. and foreign markets often go separate ways.
Most advisors, however, defend foreign diversification by arguing that the real issue over the past 10 years hasn’t been foreign stocks’ performance, but U.S. stocks’ performance.
“International portfolios have not provided unexpectedly poor returns. Rather, U.S. portfolios have provided unexpectedly good returns,” said George Murnaghan, executive vice president at Rowe Price Fleming, the foreign-investment arm of mutual fund firm T. Rowe Price Associates.
Although a savvy investor obviously might be much richer today if he or she could have foreseen the dramatic gains in U.S. stocks in the 1990s--gains driven partly by extraordinary corporate cost-cutting that sharply boosted profits--the question now is what U.S. stocks are capable of returning over the next decade, many experts say.
Much of Wall Street believes that U.S. corporate profit growth is likely to slow in coming years, limiting U.S. stocks’ gains.
Meanwhile, with foreign markets suffering much worse than the U.S. market in the current global stock downturn, many financial advisors believe that foreign stocks’ returns have a far better chance of outpacing U.S. stocks’ gains in coming years.
Some remind investors of the 1980s’ performance difference between U.S. and foreign funds: In the 10 years ended Dec. 31, 1990, the average international stock fund returned 225%, versus 203% for the average U.S. fund.
Looking at that disparity in 1990, Murnaghan said, “you might have said that you didn’t want to have anything in the U.S. market at all”--just before U.S. stocks soared.
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Indeed, some say it is a far better time to buy foreign stocks, not sell them. “When you hear people start to say that a particular investment idea isn’t a viable concept anymore, that’s often when it is the most viable,” said Steve Savage, editor of the Value Line Mutual Fund Survey in New York.
John Wong, 42, a budget analyst in El Segundo, put more than $25,000 of his retirement funds in international stock funds earlier this year on advice of a planner who recommended the move as a “diversification tool” to hedge against potential problems in the U.S. markets.
“Obviously this week has shown that it’s no hedge,” Wong said.
But Wong is holding on to his international stocks, even the additional $15,000 he has invested in the Fidelity Hong Kong & China Fund, which has lost 22% this year. “It’s not a pretty fund,” he said. “But in the long run I think that region, especially China, is going to do well.”
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* STREET FIGHT SCORECARD
Sorting out the winners and losers in this week’s stock market mayhem. D1
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Foreign Stocks’ Lagging Returns
Measured over the past five, 10 and 20 years, returns on foreign stock mutual fund investments have, on average, badly lagged returns on U.S. stock funds. A comparison:
(Annualized returns)
Avg. U.S.
5 Years: 19.2%
10 Years: 13.5%
20 Years: 16.3%
Avg. International
5 Years: 14.0%
10 Years: 8.1%
20 Years: 13.9%
Source: Lipper Analytical Services
