Inside Wall Street: Time to invest overseas
Internationally focused mutual funds are among best vehicles to profit from opportunities abroad.
Whether or not you have taken advantage of or reaped profits from the Dow's significant advance this year, it's always wise and opportunistic to invest in foreign equity markets.
For most investors, the prudent way to go international is through thoroughly seasoned and highly respected mutual funds. They provide a more balanced way to achieve diverse global investment goals.
It's not a question of whether you should do so, but a matter of not neglecting the large dimensions for growth and value that foreign assets provide. And with improving events in Europe and China conspiring to establish a more stable and attractive investment environment, it's almost a must for investors -- particularly those who have for the most part ignored investing overseas -- to go international at this point.
"As a general proposition, it's important for individual investors to have exposure to international equity markets," states John W. Rafal, founder and vice chairman of Essex Financial Services. "The benefits of international diversification can't be overstated as Europe and emerging economies recover from long and deep recessions," he adds.
How should investors approach the idea of putting money in international markets? There are "innumerable ways to create a smart international portfolio," says Rafal, but for most investors, he recommends selecting mutual funds with "proven track records and the most experienced and long-tenured management teams." Barron’s recently rated Rafal as one of the top 10 independent wealth advisors in the U.S.
How much of an exposure should an investor’s portfolio have to international stocks? "We suggest up to 25% in international, depending on your risk tolerance," said Michelle Gibley, director of international research at Schwab Center for Financial Research, in a paper she recently published.
Indeed, the individual investor would be well served by picking a series of established and well-managed mutual funds. Jason A. White, portfolio specialist at the highly respected mutual fund company T. Rowe Price, says there are specific mutual funds that could present a compelling way for individual investors to be adequately situated in international equities. The U.S. individual investor is definitely underexposed in foreign stocks, notes White, with U.S. stocks comprising some 60% to 79% of their portfolio holdings.
Here are three funds highly rated by Morningstar that, says White, practically cover every major avenue of investment opportunities abroad: T. Rowe Price Overseas Stock Fund (TROSX), T. Rowe Price International Growth & Income Fund (TRIGX), and T. Rowe Price International Discovery Fund (PRIDX). Taken as a united set, says White, who is a member of T. Rowe Price's international equity investment team, the three funds offer a “complete international equity strategy.”
Investors get a core strategy in TROSX, and in TRIGX a value style of investing. And PRIDX offers an international small-cap strategy.
Here is why these three funds represent significant value in international equities: Some 60% of TROSX’s portfolio represents well-established, large-cap European stocks and, as such, a major play in the recovery of the European economy. Its lead portfolio manager, Ray Mills, believes the fund has "high-quality companies with preferred markets in healthier economies of northern Europe, selling at compelling values." But he is also looking at quality stocks in certain markets that have been hit hard by the economic downturn for underpriced gems. So he has been scouting for opportunities in the emerging markets by buying European stocks showing growing revenues in the BRIC nations. In Asia, Japan is a major portfolio holding.
T. Rowe’s International Growth & Income Fund (TRIGX) is also significantly exposed to developed markets, with 65% of its holdings in Europe, and the rest focused on Japan which represent 16% of the portfolio, and the Pacific Rim countries with 12%, according to the fund’s portfolio manager, Jonathan Mathews. The fund has posted a solid 9.48% return in three years, earning a Morningstar rating of a four-star performer.
The PRIDX fund, which focuses on small-cap stocks, has a 23% stake in international consumer discretionary stocks, 18% in industrials, and 15% in information technology. Lead portfolio manager Justin Thomson favors companies with strong earnings and revenue growth as well as strong balance sheets that can weather adverse economic conditions. The companies in the portfolio sport market caps below $3 billion. And geographically, PRIDX is well diversified, with 18% of holdings in the United Kingdom, 17% in Japan, 11% in Germany, and 4.7% in China. As of Aug,. 15, 2013, the fund posted a three-year return of 12.59%, achieving a four-star rating from Morningstar.
The big risk in investing in international equity markets is the fast-changing events in many foreign countries, and it's almost impossible for individual investors to keep up with the volatile changes in political or economic policies. So investors have to depend on experienced and highly qualified portfolio managers at the international mutual funds to get updated on such essential developments.
That’s where trustworthy mutual fund companies, like T. Rowe Price, come in.
Gene Marcial wrote the column "Inside Wall Street" for Businessweek for 28 years and now writes for MSN Money’s Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.
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