Numerous studies have proven that when a small portion of diversified foreign stocks is added to a portfolio of domestic stocks, volatility of the portfolio declines and the potential for return increases.
These studies are fairly common and known to most prudent investors. However, there still seems to be a lot of pessimism and doubt when it comes to foreign investing. John Templeton's second rule of investing was, "Buy at the point of most pessimism and sell at the point of most optimism."
David G. Muller Jr., who worked as a consultant for the Central Intelligence Agency, has a great quote: "There's always a bull market somewhere." He is my foreign adviser and the editor and publisher of Foreign Markets Advisory ($225, P.O. Box 75, Fairfax Station, VA 22039). In this monthly publication, he lists valuable and interesting data in an unusual format.
Each month Muller calculates market performance, P/E ratios and gross domestic product (GDP) growth rates for all countries in the world that have stock markets.
His September issue showed 35 foreign stock markets that outperformed the U.S. market during the past 12 months.
This same issue shows 18 countries with lower P/E ratios than the United States Nine of these countries also have higher GDP growth rates than the United States. These nine countries are growing faster than the U.S.' 3.5 percent GDP growth rate and have relatively cheaper stock valuations than the U.S.' average P/E of 21.
As the data suggests, there are many opportunities overseas. However, there are many exceptions -- especially Japan with a P/E of 91 and a 0.8 percent GDP growth.
Given that the above is true, the next logical question involves logistics: How can anyone invest overseas cost-effectively in a diversified manner? The most convenient method is to use mutual funds, preferably no-load funds. They are inexpensive, liquid, and offer varying degrees of diversification.
Year-to-Date Performance as of 9/9/94 Gold funds 22.50 percent International funds 16.81 percent U.S. Equity Income Funds 11.69 percent U.S. Science & Technology Funds 10.35 percent U.S. Growth Funds 5.21 percent
How do you select the right foreign fund? It depends on your objective. If you simply want to diversify your domestic portfolio and you have no preference as to what foreign countries to select, you need to find a fund that is diversifie all over the world. I call these broad-based foreign funds.
The alternative to the broad-based fund is the regional or country fund. If you expect higher growth rates in certain geographic regions or countries, you migh want to use these funds. You can diversify your portfolio by purchasing several of these funds that invest in several different geographical areas.
Top Growth Rates
The countries with the best GDP growth rates are in Southeast Asia: China, 10 percent; Singapore, 9.5; Malaysia, 8.4; South Korea, 8.3; Thailand, 8; Indonesia, 7.1; Taiwan, 6.2; and HongKong, 5.2.
The most conservative way to take advantage of this growth in Southeast Asia is to purchase the Newport Tiger Fund (800-776-5455). This fund, unfortunately, does have a 5 percent load (advisers can buy the fund on a no-load basis for clients). The managers, Jack Mussey and Tim Tuttle, focus on large blue-chip stocks that have earnings growth of at least 18 percent and less price volatility relative to the smaller stocks in that region.
This fund is down 1.8 percent year-to-date but is up 16 percent (as of Sept. 12 since the first week of July. This fund was up over 75 percent last year as money poured into Southeast Asia toward the end of '93 and '94. Muller says, "These speculative excesses have now fully washed out of the markets this year, and these markets are moving up with a minimum of international hype." I interviewed co-manager Tuttle on "Arkansas' Moneytalk" recently and he shared the same sentiment.
T. Rowe Price New Asia (800-638-5660) is a no-load fund managed by Martin Wade. He's betting more on Malaysia, whereas Mussey and Tuttle are betting more on HongKong. Martin is also betting more on smaller stocks, which means this fund should be more volatile than Newport Tiger. This fund is up 18 percent since th first week of July.
There are other foreign opportunities from which to choose. For example, Europe offers many undervalued stocks selling at P/E ratios less than 10. Another example is Latin America, offering both growth and value, especially in Mexico.
If the U.S. stock markets continue to underperform these foreign markets, more investors will be placing portions of their portfolios overseas. This is an inevitable trend that warrants attention and some of your portfolio dollars.
Larry Waschka is a registered fee-only investment adviser and is host of Arkansas' Moneytalk every Saturday morning at 11 a.m. on KARN-AM 920.
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|Title Annotation:||Wise Investments|
|Date:||Sep 19, 1994|
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