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The global economy is improving, our expert says. Here's how to get in on the action.
Many foreign economies are picking up.
Mutual funds are the best way to invest overseas.
You've probably heard a lot about hedge funds lately. Many people are interested in them without quite knowing what they are. Some investors view hedge funds as aggressive plays on a strengthening stock market. Others see them as protection against a slump.
I've always been a big believer in investing abroad. Putting 10 to 20 percent of your money in foreign stocks helps to diversify your portfolio, because US and foreign economies don't always move in lockstep.
True, returns for foreign stock mutual fundsthose that invest primarily outside the USwere disappointing in 2002. The group lost 16 percent on average. Nevertheless, that was still six percentage points better than the return of the S&P 500.
That gap may widen over the next few years. For one thing, many Western European countries have made strides in improving their productivity. And because the Europeans never got caught up in the technology frenzy to the extent that we did, they aren't experiencing the same problems with overcapacity.
Many Asian countries, too, have continued to expand their businesses. Even Japan's economy appears to be making progress out of its decade-long slump. In fact, I'm more confident about the Pacific Rim than I am about emerging markets in Central and South America, which, on balance, are also making strides.
If you want to invest internationally, stick with mutual funds. The 1 to 2 percentage points a year that you give up in expenses is worth it, because picking stocks of foreign companies can be very tricky. You have to contend with currency fluctuations, possible political instability, and labor issues, among other things. None of us has the time to sort through, let alone fully understand, all of these factors. So be smart and let an experienced fund manager select the stocks for you.
I especially like four no-load foreign stock funds: American AAdvantage International Equity (800-388-3344) and Artisan International (800-344-1770), both large-cap funds; and Tweedy, Browne Global Value (800-432-4789) and Longleaf Partners International (800-445-9469) in the mid-cap category.
American AAdvantage International Equity. This value-oriented, team-managed fund has beaten its foreign stock index handily over the past three calendar years, and is up 29 percent in 2003. (Unless otherwise noted, all performance figures are through Nov. 21.) The fund's operating company is AMR Investments, a subsidiary of American Airlines' parent company.
Because American AAdvantage International Equity Fund has stayed fairly true to its value focus over the years, it has avoided the tech sector and other risky plays, favoring, instead, companies involved in financial services, consumer goods, and industrial materials. Moreover, expenses are lowabout 60 percent of the category average.
Artisan International. One of the bigger and better-known foreign stock funds, Artisan International has an enviable record, thanks in large part to savvy manager Mark L. Yockey, who was Morningstar's International Fund Manager of the Year in 1998. After a disappointing 2002, Yockey has stuck with his major bank and insurance stocks, including German insurance giant Allianz, which dropped nearly 60 percent last year. Allianz remains the fund's largest holding and is showing signs of rebounding; it's up 14 percent so far this year.
Despite its recent struggles, Artisan International has returned 11.2 percent annually (through Oct. 31) since its inception almost eight years ago. Its rivals, according to Morningstar, have managed just 3.0 percent a year. As long as Yockey remains the managerand there's no indication that he won'tArtisan International, with its blend of growth and value stocks, would make a nice addition to any investor's portfolio.
Longleaf Partners International. This fund's managers make big bets on about 25 stocks. They pay little attention to sectors and countries, focusing instead on out-of-favor companies that trade at a steep discount to their intrinsic value. Japanese stocks, for instance, account for more than one-third of the fund's assets.
A highly concentrated portfolio like this one can produce wild swings in returns. If you can't stomach a lot of volatility, pass on Longleaf Partners International. But assuming you can, I'd highly recommend the fund, whose three-year return of 8.4 percent ranks it at the top of the foreign large-value stock category. Its five-year annualized return of 14.2 percent is truly astounding, given the foreign stock category's negative returns in 2000-2002.
Morningstar places Longleaf Partners International in the "large blend" category, but it has more than a third of its assets in medium-sized companies and 19 percent in small-caps. So I consider it a mid-cap fund. About the only knock I have against it is its expense ratio, which, at 1.8 percent, is high for a fund that has more than $1 billion in assets.
Tweedy, Browne Global Value. My conservative clients like this fund, because it spreads its risk over 170 stocks, give or take, and its managers don't buy and sell in haste. In fact, Morningstar describes the fund's turnover rate as "glacial." The portfolio contains lots of names that are familiar to physicians, including Merck, Novartis, Pfizer, and Schering-Plough. Such healthcare stocks account for 14 percent of assets.
But has the fund's measured approach paid off? You bet. The 10-year average annualized return of 11.1 percent (through Oct. 31) puts Tweedy, Browne Global Value in the top 20 percent of the foreign small-to mid-cap value category for that time period. It has done poorly vs its peers this year, but don't let that scare you away. This is an excellent, well-established fund.
Lewis Altfest. Investment Consult: Time to look overseas. Medical Economics Dec. 19, 2003;80:21.