Given the perceived long-term consequences of the U.S. borrowing so much money, should you consider moving funds out of U.S. equities to international equities?
It is completely understandable for investors who watched the U.S. market absorb a continual pounding to look at other investment options. I have received numerous questions about the same issue: Given the perceived long-term consequences of the U.S. borrowing so much money, should I consider moving funds out of U.S. equities to international equities?
In 2008, the S&P 500 was down 38.5 percent (excluding dividends). However, many are surprised to learn that U.S. markets actually fared better than most others in 2008. The international MSCI EAFE (an index of foreign stocks from the perspective of North American investors) was down more than 43 percent, with markets like Brazil, Russia, India, and China down more than 60 percent-after being up 59 percent in 2007.
While many economists expect the world markets to become less dependent on the U.S. economy in the future, that hasn't happened yet.
Most analysts expect that during the next 20 years, about 70 percent of the world's economic growth will come from emerging markets. Currently, these emerging economies represent a relatively small portion of the world's stock market value. The developing world's young population, rising wealth, and attractive demographics should make these economies a powerful engine driving growth in the next decades. However, as evidenced by the volatile returns in 2007 and 2008, it will be a bumpy ride as these economies grow and mature.
We view currency diversification as an advantage of investing in international funds. The results can go both ways, though. In general, when the U.S. dollar weakens, there is a positive benefit to international fund returns; as the dollar strengthens, it has a negative impact on returns. Some funds hedge this exposure, so it pays to understand how your fund handles currencies.
You can have similar exposure by investing in U.S. companies that do significant business overseas. These companies suffer when the dollar strengthens because their overseas sales and operations in other currencies translate into fewer dollars.
Recently, I asked Robert Taylor, portfolio manager of the Oakmark Global Fund (OAKGX) and director of international research for Harris Associates, whether the average investor should have exposure to international markets. (The Oakmark Global Fund invests in both U.S. and international stocks, and it currently has about $1.3 billion in assets.)
Taylor observed that as the world becomes more of a global marketplace, the distinction between U.S. and international funds will become less meaningful. He cited Toyota and GlaxoSmithKline as examples of international companies that receive large amounts of revenues from U.S. sales, and Coke and Yum Brands (parent of Taco Bell, Pizza Hut, and KFC) as U.S. companies that receive a large amount of revenue from international markets. So just because you invest in a U.S. company does not mean that growth is coming from the United States, and likewise for international companies.
As you consider investing in international funds, make sure you understand the underlying strategy, because these funds come in many shapes and sizes. As always, these investments should be coordinated with an overall investment plan. For investors with the time to wait, investing on a monthly basis has rarely been more attractive, given the valuations of equities in today's market.