It’s a sad fact that even those Americans who have taken the wise step to invest in the stock market are limiting their investment opportunities. Most simply don’t own enough foreign stocks.
Once upon a time that may have made sense. After World War II, much of the world’s industry was devastated. What remained as best-in-class businesses were overwhelmingly American corporations. But over the past few decades the rest of the world has caught up.
“When some American workers wake up in the morning they might turn on a Korean TV, and then drive a German car to work,” says Brian Levitt, senior investment strategist at Oppenheimer Funds in New York. “It doesn’t make sense that they’d then limit themselves to just U.S. investments.”
[See: 10 Ways You Can Throw Retail Stocks in Your Cart.]
Yet overall Americans, like people in most countries, have a home bias.
There were $2.1 trillion dollars invested in mutual funds specializing in global stocks in June, versus $6.1 trillion in domestic stock mutual funds the same month, according to estimates from the Investment Company Institute.
That lopsided distribution towards domestic stocks is simply limiting choices and possibilities, Levitt says. There are many great companies based in places other than the U.S.
Better opportunities in emerging markets. Part of the opportunity set available outside American borders includes the so-called emerging markets. Stocks across the spectrum in those countries got hammered over the past few years as a strong U.S. dollar and a slowing Chinese economy sent commodity prices tumbling.
But since February, that situation is changing in favor of the beaten-down economies in emerging markets.
“This is an unwinding of a five-year trade and we believe that there is a lot more to come,” says Bert van der Walt, portfolio manager at Mirae Asset Global Investments in New York. He focuses on two mutual funds — the Mirae Asset Emerging Markets (ticker: MALGX) and the Mirae Asset Emerging Market Great Consumer Fund (MECGX). Both have annual expenses of 1.7 percent, or $170 per $10,000 invested. The minimum initial investment is $2,000 for each fund.
“We see a lot of positive data coming in now, especially from Russia and Brazil,” van der Walt says.
Part of the situation has clearly been a pause and then bounce in oil prices. Crude prices bottomed at $26 a barrel in early February and have since rebounded to the $40s.
[See: Oil ETFs: 8 Ways to Invest in Black Gold.]
The major caveat to the emerging market rebound story is that policy makers must not make mistakes. The Federal Reserve and other central banks must not tighten monetary policy too quickly, he says.
“The global recovery is fragile and it depends on policy makers to make right decisions,” van der Walt says.
There are other reasons. Stock valuations are cheaper outside the U.S., writes Jeffrey Kleintop, chief global investment strategist at Charles Schwab, in a recent research report. In general, when valuation is cheap, future returns tend to be better.
Kleintop makes two important points about the current valuation situation for world stocks. Historically, when stocks are valued as they are now, the return on global stocks has always been positive, he says. And the price-earnings multiple of 16.7 indicates that global stocks are poised to gain 14 percent annually over the next decade — if prior performance can be believed.
If in doubt, buy mega-sized U.S. companies. The idea of buying foreign stocks just doesn’t suit everyone. However, that doesn’t mean you can’t get big exposure to foreign markets through stocks listed in the U.S.
“Many investors don’t feel the need to add foreign stocks, ETFs or mutual funds to their portfolios,” says Sam Stovall, U.S. equity strategist at S&P Global Market Intelligence.
He says there are good reasons, the first of which is that close to half (44 percent) the revenues of Standard & Poor’s 500 index companies comes from outside the U.S. These are the huge multinational corporations, such as Ford Motor Co. (F) and Caterpillar (CAT), which sell in countries around the world.
Smaller companies tend to have much less foreign exposure. For instance, at the beginning of the year the Russell 2000 index, which tracks smaller-capitalization stocks, had 22 percent of the revenue from outside the U.S., according to data provided by Russell Investments.
The other key reason is currency and political risk, Stovall says. Currency risk comes when the dollar strengthens and lowers the value of stocks denominated in other currencies. A great example of political risk has been occurring these past few weeks in Turkey where a failed coup attempt has led to a harsh crackdown on media, not to mention the massive drop in local share prices. At this stage it’s difficult to know how the situation will end.
[See: 10 Best ETFs for Large-Cap Stock Growth.]
Still whatever happens, U.S. investors need to beef up their foreign exposure, one way or another.
Best Mutual Funds for Foreign Stocks
| Rank | Fund Name |
| #1 | MFS® International Value Fund MGIAX |
| #2 | FMI International Fund FMIJX |
| #3 | Tocqueville International Value Fund TIVFX |
| #4 | Fidelity® Overseas Fund FOSFX |
| #5 | First Eagle Overseas Fund SGOVX |
| #6 | T. Rowe Price RPICX |
| #7 | Artisan International Value Fund ARTKX |
| #8 | Forester Discovery Fund INTLX |
| #9 | Lazard International Equity Portfolio LZIEX |
| #10 | Cambiar International Equity Fund CAMIX |
Stock information correct as of Aug. 9, 2016, 9:12 a.m.
See the full list of Foreign Large Blend mutual funds.
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Why You Should Buy More Foreign Stocks originally appeared on usnews.com
