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International Intrigue
Solving the mystery of global investing
by Cherith hanna
June 1, 2006
W hen you consider that 77 percent of the world's 40,000 publicly traded companies are located outside the United States, and that ever more US companies are garnering significant revenue from overseas operations, it is clear that promising investment opportunities can be found all over the world.
In fact, international stocks have been handily beating straight U.S. equities for a few years now. The table on the right compares two key global equity indices to the broadest measure of the U.S. equity markets –the Russell 3000 ® Index– which represents approximately 98 percent of U.S. stocks.
Over the three-year period ended March 31, 2006, the Callan Non-US Equities Index was up 31.21 percent and the Callan Global Equities Index was up 24.11 percent compared to a return of 16.48 percent for the Russell 3000 in the same time period.
While these returns reflect only past performance and there is no guarantee of future returns, they should serve to intrigue the thoughtful investor.
Other BenefitsIn addition to the potential for enhanced returns, investing internationally also serves to improve your portfolio's overall health over the long term, because it insulates your nest egg from the vagaries of any one country's, region's or sector's fortunes. If U.S. stocks are performing poorly, your investments overseas will help balance out the impact on your portfolio.
Global Investing Defined
The phrase ‘global investing’ is a bit of a mystery in and of itself, and is often used interchangeably with the phrase ‘international investing’. To begin to unlock the code, let's start by putting some basic definitions in place.
| As of 3/31/06 | 2005 | Last 3 Years (ended 3/31/06) | |
|---|---|---|---|
| *The Callan non-US equity Index measures the performance of stocks in both developed and emerging foreign markets | |||
| **The Callan global equity Index measures the performance of both US and international stocks | |||
| Callan non-US equities Index* | 9.63% | 27.05% | 31.21% |
| Callan global equities Index** | 6.71% | 19.48% | 24.11% |
| Russell 3000® | 5.31% | 18.08% | 16.48% |
Domestic equities – The stocks of companies domiciled in the United States. Although domiciled here, many of these companies have significant overseas operations; Boeing — which sells its planes all over the world — is a good example.
International equities (developed world) – The stocks of companies domiciled in economically and politically mature foreign countries that may operate both within and outside of their home countries. Finnish cell phone maker Nokia, for example, sells most of its handsets outside of Finland.
International equities (emerging markets) – The stocks of companies based in developing countries; these are countries that are transitioning from economic and political strife to market-driven economies and political stability. A few examples are the former Soviet Union and Eastern bloc countries.
What then is global investing? It is essentially combining domestic equities with international equities — from both the developed world and emerging markets — to take advantage of investment opportunities wherever they arise.
Before you make any investment, you must ask yourself some key questions:
How long do I have to invest; do I have the time to wait out the market's peaks and troughs?
What do I already have set aside and what percent of my portfolio is currently allocated to international investments?
Am I a conservative, moderate or aggressive investor; that is, am I willing to accept no risk, a moderate amount of risk or a high degree of risk?
Vincent McBride, portfolio manager for Lord Abbett's International Core Equity fund, says there are some additional risks associated with international investing that you also need to consider.
“First, you have to consider currency risk. Changes in the value of the currency in which you purchased the investment (relative to the dollar) will affect the total loss or gain on that investment. The good news is that over the long-term, these currency movements tend to even themselves out across your investments.
Secondly, you need to consider what's known as event risk. Political, economic, or natural disasters can adversely impact a country's economy and its securities markets; however, they can also bring about desirable changes like tax cuts and positive changes in inflation and interest rates.”
Examine all the EvidenceAs you consider adding an international component to make your portfolio more global, be sure that you include all assets in your analysis. Suzanne Durbin, a wealth advisor with Atlanta-based GV Capital Management says: “When evaluating any asset class for inclusion in your portfolio, it is critical that you take into account every asset you own — from workplace plans like a 401(k), to your bank accounts, to Rollover IRAs, to annuities, to employer stock purchase plans — and decide how to incorporate that asset class across the whole of your portfolio.”
That being said, your retirement plan may be a good place to start when it comes to international investing. Len Antes, chief investment officer at retirement plan provider Diversified Investment Advisors based in Purchase, NY says, “Allocating some portion of your retirement savings to international investing makes sense because you typically have the luxury of a very long-term investment time horizon that allows you to ride out the market's peaks and valleys. Over the long run, international stocks should provide additional portfolio return and risk reduction benefits.”
A Model PortfolioHow much you allocate to international investments ultimately depends on how you view the special risks and considerations of this asset class. In the chart shown below, however, we can see how someone who characterizes themselves as a conservative/moderate investor and who is in mid-career might structure their portfolio. This investor has allocated 44 percent of their total assets to domestic equities and 15 percent to international stocks; however, a more aggressive investor could have as much as 30 percent or more allocated to international investments.
Taking the First Step
One of the simplest and least expensive ways to get into international investing is through an international or global mutual fund.
Asset allocation funds are also a great way to go. The beauty of these funds is that they totally demystify global investing; a professional manager sets the asset allocation strategy and then adjusts the portfolio as markets shift. You will often find asset allocation funds offered in 401(k), 403(b) or 457 plans in the workplace.
If you decide to buy individual securities, you might want to work with a professional financial advisor who can provide you with specific advice and guidance. If you do not already work with a financial advisor, ask around at work, among your friends or at your church for a recommendation.
Final ThoughtsThe potential positive impact global investing can have on your portfolio makes it an asset class worthy of a closer look. If you take the time to do your homework, you may find that it's less of a mystery than you think.
