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Lui on international stocks
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August 25, 2000: 11:13 a.m. ET
Guest on chat series says markets abroad will outperform Wall Street
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NEW YORK (CNNfn) - The outlook for international stocks has never been better, and investors should have up to 45 percent of their money outside the United States, a Strong Fund stock manager told a chat audience on CNNfn.com this week.
David Lui, manager of Strong International Fund and Strong Overseas Fund, answered questions Thursday as part of a weeklong chat series in CNNfn.com's special report, The Road to Riches.
Lui was an international portfolio manager for Phoenix Investment Partners before he joined Strong Funds in 1998. A graduate of Massachusetts Institute of Technology, Lui has an M.S.E. from Boston University and an MBA from Stanford University, where he was an Arjay Miller Scholar.
Here is an edited transcript of Lui's session. (Note: CNN staffers asked some questions).
Chat moderator: Welcome, David Lui, to the CNNfn chat room.
David Lui: I say that this is one of the best times to invest in international markets. The U.S. economy is slowing down right now, whereas the international economies are on the rise. Therefore, the earnings of these foreign companies are most likely to outpace those of the U.S. companies in the foreseeable future. Outside the U.S., most of the developed markets look very promising. We don't see dark clouds on the horizon.
Chat moderator: What percentage of a retirement portfolio should be in international stocks?
Lui: The total market capitalization of the U.S. stock market is about 55 percent of the market capitalization of all the stock markets. Therefore, to be market-weighted, one should have about 55-to-60 percent of his or her stock portfolio in U.S. stocks, and about 40-to-45 percent in foreign stocks. Because these foreign markets tend to be a little more volatile than the U.S. stock market, I would recommend that a retiree keep no more than 25 percent of his or her portfolio in international stocks.
Question: How does investing in foreign markets compare to investing in foreign stocks on American markets and American depositary receipts (ADRs)?
Lui: The number of ADRs that are available to U.S. investors is only a very small subset of what is available outside the U.S. Therefore, the ADRs are only a very small representation of the investment universe outside the U.S. If an investor tries to build a diversified international stock portfolio by buying only ADRs, he or she is unlikely to succeed. The ADRs are mostly limited to the big cap foreign stocks and also foreign stocks in the most popular industrial sectors, such as telecom, meteor and technology. A U.S. investor who relies solely on ADRs will not be able to build a sector-diversified stock portfolio.
Question: How about foreign stocks on American markets like CHKP or SIFY?
Lui: CHKP is Check Point Software (CHKP: Research, Estimates) and SIFY is Satyam Infoway (SIFY: Research, Estimates). These are the ADRs of a high-tech company in Israel and a high-tech company in India. As I mentioned earlier, an investor in the U.S. is limited to a few industrial sectors, while Check Point Software is attractive. It is way overpriced because of its scarcity value. I would not go crazy on these two stocks.
Question: David, I'm nervous about investing in (international) companies. Does investing in a fund help to cut down on the risk?
Lui: Absolutely. By investing in a fund that has a broadly stock-diversified and industry-diversified portfolio, a U.S. investor could improve the risk-adjusted return of the overall portfolio. A U.S. investor should never invest in foreign stocks directly. The relatively high brokerage commission rates, the foreign exchange expenses and the high bid/offer spread will make it very difficult for a U.S. investor to make money if he or she invests directly.
By investing in the foreign markets through a mutual fund run by a good portfolio manager, the investor will get a well-diversified portfolio that also enjoys economies of scale so that the transaction costs and the foreign exchange costs will become minimal, relative to the total size of the fund.
Question: David, I have limited investing experience. Where can I research international stocks on my own, and can I just buy them like I buy stocks on the American market? Are there international taxes or restrictions?
Lui: Yes. As I mentioned earlier, the transaction costs and the foreign exchange costs are prohibitively high for a U.S. individual investor. If you still insist on investing in the foreign stocks directly, despite these concerns that I just mentioned, you can go to the Web sites of these foreign companies and get a lot of information on these companies. Therefore, you can do your own research.
There are a lot of taxes, such as dividend withholding and capital gains taxes, which will be assessed on a U.S. individual investor. At the end of the day, it's very difficult for a U.S. individual investor to make money in foreign stocks because of the factors I have mentioned in the last few minutes.
Question: Can you talk about your portfolio at the Strong International Fund? What markets do you invest in, and what resources are available to research various funds that invest internationally?
Lui: We research our companies by meeting with the CEO and CFO of the companies we invest in, and also all the companies that we are interested in. We receive valuable information from these senior managers, and this enables us to outperform. At the moment, we are market-weighted in Europe, as well as Asia. We have about a four-to-five percent exposure in Latin America, and about 10 percent in Canada. We run a very well industry-diversified portfolio so that we will not be impacted negatively should any particular sector decline significantly -- for example, the high-tech sector.
Question: What kind of return have your funds had so far this year?
Lui: This year, the Strong International Fund is down 14 percent, and the Strong Overseas Fund is down 11 percent. The reason why we are down so far this year is because a lot of our stocks that did very well in 1999 corrected. Our investment style calls for holding great companies over the long term with minimal turnover. Last year, the Strong International Fund returned 93 percent, and the Strong Overseas Fund returned 97 percent. We tended to hold onto our good companies, which did exceptionally well last year, but corrected in March, April and May this year. However, the company fundamentals remain very strong, and we believe that these companies will come back in a big way in the near future.
Question: What are some of your funds' core holdings?
Lui: They include Nortel Networks of Canada, STMicroelectronics of France, TABCORP Holdings of Australia, Li & Fung of Hong Kong, Daiwa Securities of Japan and BP Amoco of the United Kingdom.
Question: Can you please discuss your view on the European markets?
Lui: We remain absolutely bullish on Europe. There is an increasing level of interest in equities at the expense of bonds by the European investors, as they have to invest for their own retirement.
The Europeans also saw what happened to the U.S. after an extended period of restructuring in the late 1980s and the early 1990s. The net result was that the U.S. economy emerged much stronger than before. The European companies would like to follow the footsteps of the U.S. companies and, therefore, are going through their own version of industry restructuring, consolidation, privatization and deregulation.
The weak euro is going to help the export-driven economies in western Europe.
The relatively high level of unemployment that still exists in Europe means that these European economies can continue to grow at a relatively higher rate than the U.S. without stoking inflation.
Finally, the arrival of the common currency, euro, is likely to lead to an extended period of prosperity in Europe in the foreseeable future.
Chat moderator: What are your favorite holdings?
Lui: Those that I mentioned earlier remain the stalwarts in our portfolio. On top of that, we also like Bnp of France, Accor of France, Mediolanum of Italy, Numico of the Netherlands, Energis of the United Kingdom, Johnson Electric of Hong Kong, Wipro of India and Taiwan Semiconductor Manufacturing of Taiwan.
Chat moderator: Thank you, David Lui, for being a part of our Retirement Chat series.
Lui: I see that we are going through a period of economic competition rather than military competition globally. Even some of these so-called rogue countries like Iran, Libya and North Korea are extending an olive branch to the U.S. Every country would like to participate in the growth in the global economy rather than participating in any further military conflicts. This tells me that we will continue to enjoy an extended period of peace and prosperity. Therefore, I am sure we can continue to profit handsomely from investing in the global stock markets inside and outside the U.S. But growth will be faster outside the U.S., so don't miss the boat, and come grow with me.
Chat moderator: Thank you, David Lui. Good-bye.
Lui: Thank you.
* Disclaimer 
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