Globe-Trotting Investors Reap the Payoff
By CRAIG KARMIN
September 25, 2005
online.wsj.com.
(Nearly my whole portfolio is in foreign stocks now, especially Aisa. And doing VERY well, thank you! The growth isn't happening in the US, except in the oil and war sectors - I call it the oily war economy!)
At a time when U.S. stocks are struggling, many American investors are setting their sights abroad. Returns there have been higher, investing is becoming easier, and many analysts see future prospects as brighter.
Without much fanfare, foreign stocks are poised this year to extend their longest winning streak versus U.S. stocks in nearly two decades. The Morgan Stanley Capital International EAFE Index -- a broad measure of share performance in Europe, Australia and parts of Asia -- is up 4.9% in dollar terms, compared with a 0.3% gain for the Standard & Poor's 500-stock index, and a decline of 3.4% for the Dow Jones Industrial Average.
If overseas shares maintain that lead, it would mark the fourth consecutive year that U.S. investors have found superior stock-market returns abroad. That hasn't happened since overseas stocks came out on top from 1983 to 1988.
"The story in Europe and Japan is getting very compelling," says Bill Wilby, director of equities at OppenheimerFunds Inc., a New York money-management firm. "It wouldn't surprise me to see a significant period where foreign markets outperform the U.S."
[Foreign Competition]
Fund managers say the better overseas performance of late reflects cheaper stock prices abroad, an acceleration in corporate restructuring in Europe and Japan and the rises in commodity prices that have boosted many emerging-market economies. They also point to the dollar's decline since 2002, which enhances foreign stock returns for U.S. investors when translated back to greenbacks.
During foreign stocks' last big run, investing abroad was limited primarily to an elite circle of institutional investors, while most individual investors watched from the sidelines. But that's changing. Money flows into international stock funds are expanding at a record pace and individual investors have more ways to invest abroad than ever before.
Today, there are more than 700 mutual funds dedicated to investing abroad, compared to just 55 in 1985, according to fund tracker Morningstar. There are also 44 international exchange-traded funds (ETFs), which are baskets of securities that track an index but -- unlike ordinary mutual funds -- trade on exchanges like stocks and charge lower fees. Moreover, 475 foreign companies trade on the New York Stock Exchange or Nasdaq Stock Market as American depositary receipts, compared with 331 companies in 1995.
Attracting Attention
The outperformance by foreign stocks has been attracting the attention of the big institutional investors: U.S. net purchases of foreign stocks totaled $63 billion during the first seven months of 2005 -- up 33% from the same period last year and on track to exceed the record $89 billion in net foreign purchases in 2003, according to the U.S. Treasury Department.
And this trend is being echoed among small investors. International stock funds have received net inflows of $52 billion through Sept. 21, on pace for a second straight record year, according to AMG Data Services. Most of the big mutual-fund companies, including Fidelity Investments, T. Rowe Price and Federated Investors, offer a variety of international stock funds.
Investors have piled into these foreign funds even at times they have felt skittish about U.S. stocks. In each of the past six weeks, for instance, domestic stock funds had outflows while foreign stock funds have seen inflows. In fact, AMG says that foreign stock funds have experienced outflows only one week this year.
Some investors say that with U.S. interest rates poised to rise further while rates are holding steady -- or even falling -- in some major overseas markets, the gap between U.S. economic growth and growth in the rest of the developed world could begin narrowing.
"The global growth engines of late have been the U.S. consumer and Chinese labor," says David Rosenberg, head of U.S. investments for Citigroup Private Bank. "As the U.S. runs out of the ability to consume at the same rate, it is essential that Europe and Japan pick up the pace. And we are seeing signs that this is happening."
Sizing Up Risks
Investing abroad doesn't come without several risks, notably currency swings, extra expenses and political uncertainty. Morningstar says the average international mutual fund has an expense ratio about 0.19 percentage points higher than the average domestic stock fund. That translates to an added $19 annually in fees on a $10,000 investment.
ETFs typically charge less than half the fees of international mutual funds and offer exposure to broad international indexes, as well as to 24 countries, including investor favorites such as Japan, China, Germany and the United Kingdom. But frequent traders will find that brokerage commissions on ETFs add up, in some cases wiping out any cost savings.
Most international funds don't hedge their currency exposure, so their performance in some years can largely reflect currency movements. This year, for instance, the MSCI EAFE Index has returned 14.8% in local-currency terms. But the greenback's rebound in 2005 has lopped off nearly 10 percentage points of that return when converted to dollars.
Investing in many overseas markets, especially in the developing parts of the world, is still considered riskier because the market zigzags are wilder, information on individual companies is harder to come by and foreign investors often are treated as second-class citizens by many companies.
Even so, some financial consultants recommend that U.S. investors devote about 20% of their stock portfolios to overseas markets, up from a suggested allocation of around 10% just a few years ago. This reflects the belief that international stocks help diversify a portfolio, making it less volatile, and that many of the world's best companies are found abroad.
The most attractive growth prospects these days are in emerging markets, and the MSCI Emerging Market Index has doubled in less than four years. But after that run, some global investors think more-consistent returns in the years ahead will be found in Japan and Europe.
Tokyo's Nikkei Stock Average, for instance, recently hit four-year highs -- a response to improving consumer demand, rising corporate spending and stronger earnings that attracted foreign investors -- and many analysts expect further gains following this month's election victory by Prime Minister Junichiro Koizumi.
In Germany, despite a disappointing performance by reform-oriented candidate Angela Merkel that left the government in limbo, investors say the trend toward corporate restructuring will continue.
Write to Craig Karmin at craig.karmin@wsj.com1 |
