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Is it time to invest abroad?
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July 28, 1999: 6:34 a.m. ET
Diversifying your portfolio is smart, but analysts say know the risks first
By Staff Writer Shelly K. Schwartz
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NEW YORK (CNNfn) - By anyone's definition, domestic equities have been batting 1,000.
In the last five years, the S&P 500 index surged to 1347.76 from 444.27, the tech-heavy Nasdaq composite index nearly tripled to 2,864 from 1,042 and the Dow Jones industrial average has broken one record after another.
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Fueled by the underlying strength of the nation's economy, in fact, U.S. stocks rose to near stardom status, having surged against a backdrop of currency devaluations and loan defaults abroad.
Now, though, some say the tables may be turning. Analysts suggest certain sectors of the U.S. stock market are overvalued. Federal Reserve Board Chairman Alan Greenspan indicated he's prepared to raise interest rates a second time if inflation signs surface and an economic recovery in Japan and Europe appears to have found its footing.
So where does that leave you?
Well, if you haven't done so already, analysts say it may be time to break up that domestic stock portfolio and share the wealth.
"If you look at the growth differential (between the U.S. and international equities markets), it seems to be falling out of favor in the U.S.," said Joe Portera, director of the international group at Mackay Shields. "You have to start wondering whether you should be putting some more of your money into international stocks."
With the recent roller-coaster performance of international stocks and mutual funds of late, however, Portera acknowledged "it's still so difficult [for many investors] to make that leap of faith."
Maybe this will help:
Warburg Pincus Advisor Japan Growth Fund was up nearly 90 percent as of late last month and Warburg Pincus Advisor Japan Small Company Fund had surged 113 percent, according to Morningstar.
The two funds were among the top four in year-to-date returns among some 1,200 international funds rated by Morningstar.
(Click here for the story)
"The prudent investor may want to take some of their money off the table and maybe they should be looking overseas," Portera said.
Michael Burpee, owner and president of Tip Bermuda Ltd., said he believes a growing number of U.S. investors are.
"They are very much looking abroad and they have been since October of last year," he said. "U.S. investors are looking extensively in Korea and Japan, and they are strong in the United Kingdom and Europe, too."
Based on current economic conditions, Burpee said he advises individual investors to invest in Europe and Asia. A smaller portion of their portfolio should be allocated to stocks in Latin America, he said, noting the devaluation of the Brazilian real has "really upset the apple cart there."
"An individual who can take the currency risk and who has a longer-term horizon should have at least 25 percent of their portfolio invested internationally," Burpee said.
In the United Kingdom, he also advised investors picking individual stocks -- as opposed to mutual funds -- to keep their eyes on retailers, which would reap the biggest rewards from economic growth in that nation.
Small investors turn to funds
Burpee noted, however, that individuals with $100,000 or less to invest should really find one or two "good mutual funds" instead. Funds deliver the added benefit of professional expertise.
Dan Kobussen, international funds analyst with Chicago-based fund tracker Morningstar said that's good advice.
He noted though you should be clear on how those funds invest. Consider their investment strategies. Are the fund managers aggressive or conservative? Do they invest in the riskier emerging markets or developed nations? Large caps or small caps?
"Emerging markets are much more volatile, in Asia in particular, both on the upside and the downside," he said, adding the same can be said of developing markets like Russia and Eastern Europe.
Over the long term, performance data shows you'll likely experience less volatility if you stick with funds tied to Britain, Japan and Eastern Europe -- although less risk though often comes with lower rewards.
Top picks
Michael Porter, international mutual fund manager for Solomon Smith Barney, said his favorites include the WEBS Index series of country-specific mutual funds, traded on the American Stock Exchange.
Among the best performing, he said: Japan WEBS (EWJ), Singapore WEBS (EWS), and the Australia WEBS (EWA).
Porter also recommends the Templeton Vietnamese and Southeast Asia Fund (TVF), which is trading at a 19 percent discount to its net asset value. Templeton Asset Management is run by veteran fund manager Mark Mobius.
Risk factors
But individuals getting their feet wet in overseas investing should educate themselves on the risks inherent first.
Exchange rates, for example, can rob you of your gains, said Kobussen of Morningstar.
That's because you generally purchase shares of international companies in the local currency.
"Say the security (stock) you bought goes up 10 percent, but the U.S. dollar rises against the local currency by a greater percentage than your security has grown," Kobussen said. "You can actually end up with a loss in dollar terms."
The reverse is true, too. If the dollar weakens against the country's local currency, that can work to your advantage.
"That's something investors should consider," Kobussen said. "In addition to the security's performance, you're going to have volatility related to currency swings, too."
You should also consider the added cost of buying stock abroad, said Nicholas Horsley; international portfolio manager for OppenheimerFunds Inc.
"Hiring a broker in London or any other foreign city could cost you an arm and a leg," he said. "There's a transaction cost here."
One of the best, and cheapest ways to break into international stocks, Horsley said, is to buy American Depositary Receipts. ADRs are shares of international companies traded in U.S. markets.
Contrary to some perceptions, ADRs won't insulate you from currency fluctuations, he said, but they will cost you less to purchase since ADRs are traded in the U.S.
Lastly, if you're picking individual stocks on your own, Horsely said there is a danger in purchasing big name international stocks alone.
According to him, many of the largest companies in London, for example, do the bulk of their business outside of the United Kingdom.
"You find numerous British companies with substantial business in the United States, for example," Horsely said. "So, just because it's listed on the foreign exchange, (it) doesn't mean it necessarily reflects (the nation's economic climate)."
And it won't deliver the diversification benefits you seek.
Stats
As for performance statistics on international securities, they won't give you much comfort. But analysts say the tide is beginning to shift and the gap that separates U.S. equity gains from lagging stocks abroad should narrow this year and next.
Year-to-date, the MSCI EAFE index -- which stands for Europe Australiasia, and the Far East -- has produced year-to-date returns of 4.11 percent. Total annualized returns were 8.52 percent for the last five years, 6.92 percent for the last decade, and 15.18 percent in the last 15 years.
By comparison, the S&P 500 index -- which tracks large cap U.S. stocks -- has produced total annualized returns of 12.38 percent. Returns for the five-year period were 27.87 percent. The index climbed 18.78 percent in the last decade, and 19.22 percent in the last 15 years.
The percentage gains are based on U.S. dollar returns. They include gross dividends on a before-tax basis and are calculated through June 30.
"With the [Federal Reserve Chairman Alan] Greenspan testimony and higher interest rates, maybe investors should be thinking about investments in international stocks," Horsely said. "Not immediately perhaps, but every individual should have some portion of their investment in international stocks."
How risky should you get? It's up to you, but Horsely said the basic rule of investing applies: "The younger you are, the more volatility you can take." 
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