Developed Markets

by Nancy Zambell, Contributing Editor

Six years ago, 8 cents of every dollar flowing into U.S. mutual stock funds was invested overseas. Last year, that number had soared to 77 cents. According to consulting firm Financial Research, in just the last three years U.S. mutual fund investors have added some $1 trillion to international and global funds, increasing their stake to $1.6 trillion at the end of 2006, from $630 billion. This global rush boosted international and global funds' share of equity funds to 26%, from 16% three years ago, according to Bloomberg.

Stock markets are cyclical. Sometimes domestic investments are better; other times, international. But for two of the past three decades, international equity indexes outperformed U.S. indexes.

What has caused this global running of the bulls?

• Rising interest rates in Europe
• Stellar growth rates in emerging and developing countries, spurred on by the hot commodity markets
• Economic recovery in international markets
• Uncertain economic and political climates in the United States.

Financial Research states that five of the 10 best selling mutual funds in 2006 were world funds: American Funds Capital World Growth & Income (CWGIX), a large-cap value fund; American's EuroPacific Growth Fund (AEGPX), large-cap blend; Dodge & Cox International Stock (DODFX), large-cap value; MSCI EAFE (EFA) a large-cap blend exchange-traded fund (ETF), and Fidelity Diversified International Fund (FDIVX), large-cap growth.

And although investment gurus have been talking of nothing but emerging markets in the past year, these funds were not in "hot" markets or invested in speculative equities or even in individual countries. Instead, they were all broadly diversified, with relatively conservative investments styles.

Some of the best performers last year: Spain, up nearly 30%; Norway, up 28%; Portugal, up 27%, Ireland, up 26%, and Denmark, up 21%.

As I mentioned in closing last week's Financially Fit column, emerging markets had cooled off and some pros have been advocating directing additional internationally targeted investment monies into non-emerging markets. After the recent rout in China's stock market, which adversely affected other stock markets around the world, it looks as if they may have the right idea.

Although I don't think giving up on emerging markets is the right tactic for most investors, I do caution overindulgence. That being said, however, I think investors do need diversified exposure to emerging, developed and domestic markets. As my mother was fond of telling me, it's never a good idea to put all your eggs in one basket.

Fortunately, there are several paths to help you diversify internationally.

The most conservative of investors may choose to opt for multinational companies that have foreign exposure through their international operations. Some of the most popular of these with investors include: Microsoft (NASDAQ: MSFT), Intel (NASDAQ: INTC), Coca-Cola (NYSE: KO), General Electric (NYSE: GE), Wal-Mart (NYSE: WMT) and McDonalds (NYSE: MCD).

Additional conservative routes include buying shares of foreign companies that are denominated in U.S. dollars via American Depositary Receipts (ADRs). More than one-half of the largest public companies in the world reside outside the United States, and U.S.-listed stocks account for just 28% of global equities. Many investors may not realize that some of the best known brands are owned by international companies.

Some of the most popular ADRs include: Toyota Motor (NYSE: TM), Honda Motor (NYSE: HMC), SONY (NYSE: SNE), Nokia (NYSE: NOK), Ryanair (NASDAQ: RYAAY), and (InterContinental Hotels (NYSE: IHG).

Alternatively, investors may consider an ETF of ADRs, such as BLDRS Europe 100 ADR Index fund (NASDAQ: ADRU), which tracks the performance of a basket of 100 European-based companies; BLDRS Asia 50 ADR Index fund (NASDAQ: ADRA), comprised of 50 leading Asian firms; BLDRS Developed Markets 100 ADR Index fund; (NASDAQ: ADRD), 100 large companies in Europe and Asia; or the BLDRS Emerging Markets 50 ADR Index fund (NASDAQ: ADRE), comprised of equities in 11 nations, including Brazil, China, Indonesia, Russia and Taiwan.

For investors willing to take on a little more risk, ETFs and mutual funds also offer diversified paths to build your international portfolio. Here are a few to consider:

Mutual Funds:

Large-cap: Mutual Discovery (TEDIX), Templeton Growth, (TEPLX), Oakmark International (OAKIX)

Mid-cap: Oakmark International Small Cap (OAKEX); GMO Foreign Small Companies IV (GFSFX); Putnam International Capital Opps (PIVYX)

Small-cap: DFA International Small-Cap Value (DISVX); SA International Small Company (SAISX)

Emerging: DFA Emerging Markets Small Caps (DEMSX); American Century Emerging Markets (AMKIX); AIM Developing Markets A (GTDDX)

Bonds: Payden Core (PYCBX), American Century International (BEGBX)

ETFs:

Vanguard Total Stock Market (AMEX: VTI); large-cap blend

Vanguard European Stock (AMEX: VGK); large-cap blend

iShares S&P Global 100 Index (NYSE: IOO); large-cap value

iShares MSCI EAFE Index (NYSE: EFA); large-cap blend

iShares MSCI Emerging Markets Index (NYSE: EEM); large-cap blend

Vanguard Emerging Markets Index (AMEX: VWO); large-cap blend

As you can see, there are multitudes of global and international investment vehicles. As you embark upon your research to find those that best suit your risk profile and portfolio strategy, please remember that while global investments have given investors superior returns for a number of years, nothing is guaranteed. So, please analyze these investments as you would any other and limit them to a small portion (no more than 10%) of your portfolio.

Until next week...

 This concludes this week's issue of Financially Fit.  We encourage you to visit our website to review past issues of Financially Fit:

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