of two decades, Bill Potter didn t venture far with his investments, sticking to stocks and bonds of U.S. companies. But two years ago the California technology entrepreneur came across a number that shocked him: 1.2 billion. That s the expected size of the middle class two decades from now in emerging-market countries like China and India. Suddenly aware of a powerful new engine for global growth, the 44-year-old started plowing money into overseas investments. It was, he says, just an obvious decision.
Potter, who had the good fortune and strong stomach to invest during the depths of the financial crisis, says he s doubled his money on many of his foreign stock picks. But rather than taking his money off the table, he took advantage of recent pullbacks to invest even more. After all, he reckons, that middle class will only get bigger and wealthier in the coming years, fueling growth in Asia, Latin America and even parts of Africa. Some friends think he s crazy and ask him how he sleeps at night. But he looks at it a different way: My goal is early retirement, he says.
Few financial advisers would recommend making an all-out bet on foreign investments. But a growing number are urging clients to make a serious shift abroad, arguing that much of the rest of the world is experiencing faster growth and better returns than the U.S. According to research firm Ibbotson Associates, a $10,000 investment in Standard & Poor s 500 would have shrunk to $9,807 over the past decade. That same amount in a foreign stock portfolio split evenly between emerging and developed markets would have nearly doubled, to $19,448. After years of going light on foreign exposure, many advisers now say investors should have at least 20 percent of their portfolio in overseas investments and that younger, more aggressive investors could ratchet that up closer to 50 percent. If you don t have exposure to foreign stocks, you re shortchanging yourself, says David Marcus, a veteran manager who runs Evermore Global Value fund.
Sending more money abroad might seem like a foolish idea at a time when Greece and other European nations are battling their way through debt crises and political hot spots are flaring up around the globe like so many whack-a-moles. To some investors, it all seems like a good argument for playing it safe and sticking with what s familiar. And many are doing just that: Americans, on average, have about 90 percent of their money invested in the U.S., even though this country now accounts for less than half of the world s stock market value. But investment pros note that foreign markets muddled through traumas that spooked investors in the past; problems like the Asian currency crisis of 1997 and Russia s default a year later are just distant memories today.
Economists and market strategists say the case for going global doesn t rest solely on near-term bargains in stocks, bonds or other investments. It also rests on the conviction that over the long term, economic growth will be stronger in many countries outside the U.S. While the U.S. economy is growing at about 3 percent this year, developing economies like China, India and Brazil are growing two or three times faster. Many emerging markets boast young populations with high savings rates and strong government balance sheets, thanks to steps they took after their own financial crises a decade ago. Indeed, if India were traded on an exchange, it might be considered a growth stock: It has $280 billion in reserves and an economy expected to grow at an 8 percent clip for its current budget year.
Some veteran money managers argue that even slower growing places like Japan and Europe now offer bargains for the long term. Skittish investors pulled more than $6 billion out of foreign stock funds in May, leaving some strong, profitable companies in places like Germany, Spain and Switzerland at attractive prices. There is a party in Asian emerging markets and a funeral in Europe, says Marcus. I would rather go to the funeral for the deeper discounts.
Of course, foreign investing still poses risks, from unpredictable governments to stock markets whose shares are so thinly traded that they are difficult to get in and out of quickly. Then there are the economic challenges. As China tries to slow its growth to avoid inflation, will it choke off consumer demand? As European nations slash spending, will they dip back into recession? Experts say the short term could be rocky and that investors should be willing to stick with these markets for years. Over the long run, foreign stocks are important, not just to make money but to hang on to it, says David Riedel, founder of an emerging-markets research firm that bears his name.
Here are five ways to trot the globe.
> For the better part>
In 2003, Claude Coltea and his father decided to invest in real estate in their native Romania. Among their purchases: a $4 million castle in Transylvania that used to house tuberculosis patients. Although it needed an extensive renovation, it was in a prime vacation spot. So the Chicago investors fixed the place up and five years later came away with a profit of eight times their original investment. Investing overseas is what saved us during the downturn, says Coltea.
Not ready to buy a European castle? Many investment pros believe that global real estate still deserves a place in a diversified portfolio. That s because real estate typically doesn t move in lockstep with global stocks or, for that matter, with property in other areas, says Chip McKinley, a portfolio manager with Cohen & Steers Global Real Estate Strategies, which manages $11 billion. (The glaring exception was during the worst of the financial crisis, when nearly every asset class headed south.) Different areas of the world have vastly different growth profiles, McKinley says. While much of Europe has challenges, he says the economies of many Asian and Pacific countries remain robust. He particularly likes Australia for its growth, which he sees as the strongest of countries in the developed world.
While it s possible to buy foreign real estate stocks, it s far easier for most investors to buy mutual funds and their low-cost competitors, exchange-traded funds. And though some of the deep discounts in foreign real estate are gone, prices remain well below their 2007 peaks. Ritson Ferguson, chief investment officer of ING Clarion Real Estate Securities, which manages $17 billion, says Japan s long stock market slump and slow economy have led to bargains in that country. He especially likes the opportunities in the Tokyo office market. Property doesn t seem to be the dirty word it was two years ago, he says.
Photograph by Evan Kafka
Not long ago, if someone recommended that you invest in Brazilian bonds, you might have thought they d spent too long at Carnival. Today you might thank them for the tip. Indeed, some people think Brazil is in better financial shape than the U.S., at least by some measures. Brazil s ratio of debt to gross domestic product a gauge of a country s public-debt burden is lower than that of the U.S., says Daniel Tenengauzer, head of emerging-market fixed-income strategy at Bank of America Merrill Lynch.
While many people think of U.S. Treasurys when they think about bonds, fully two-thirds of the $90 trillion global-debt market is outside this country. And many pros argue that bonds of some emerging economies look particularly attractive. Brazil s 10-year local currency bonds yield an eye-popping 12.3 percent, compared with 3 percent for the comparable U.S. Treasury. Brazil s bonds don t carry the top rating of U.S. government bonds, and the country also has higher inflation expectations than the U.S. But David Hoffman, manager of the Legg Mason Brandywine Global Opportunities Bond fund, says the South American giant has strong growth potential, fueled by its resource-rich economy. Brazil has everything going for it, he says. I guess you d call it a land of luck now.
Of course, few pros would suggest investors devote their entire global bond allocation to emerging markets. Bonds in many of those markets fell earlier this year, as Greece struggled to avoid defaulting on its massive public debt. And investing in individual bonds can be impractical. The answer, say some advisers, is to invest in a bond fund that gives its manager the freedom to pick and choose from bonds around the world. Hoffman is shopping on many continents these days. In addition to Brazil s, South Korea s and Poland s government bonds get the fund manager s thumbs-up. The reason: Both held up well during the global recession.
Try keeping track of the rupee and the ruble while analyzing the latest crises in the Middle East, Korea and Thailand. Add in trade wars and the shifting monetary policy of the European Central Bank and it s easy to see why many financial advisers recommend mutual funds or ETFs instead of individual stocks for investors who want to boost their foreign holdings. It s more complicated than the U.S. because there are so many moving parts, says Ron Weiner, president of advisory firm RDM Financial, which has been putting more of its clients money abroad in recent years.
After the market hit its low in March 2009, U.S. investors plowed $80 billion into foreign stock funds over the next 13 months while withdrawing more than $6 billion from U.S. stock funds. But jitters about soaring government budget deficits and the health of the global economy led some investors to pull money out of foreign funds in May, according to the Investment Company Institute, the fund-industry trade group. For long-term investors, that s not a bad thing: The sudden upsurge in fear has led to buying opportunities around the globe, say investment pros.
Most brokers offer an array of choices, but it doesn t make sense to plunk money into just any foreign fund. Many international funds are skewed toward big companies in Europe or Japan, with little exposure to emerging markets. And loading up on hot markets like Brazil, India and China can leave an investor with too much risk. That s why some managers of broad-based global funds are using the market s recent downturn to broaden their own portfolio mix. Alex Motola, of the Thornburg International Growth fund, often hunts for smaller, fast-growing Asian companies. But he s recently been scooping up stocks in Europe. You can t buy these companies at these prices very often, he says.
Many investors are tiptoeing into foreign markets without even knowing it. U.S. companies such as Apple, Avon Products and Google do so much business outside the U.S. that buying their shares is like buying a stake in nearly every region of the globe. In fact, some 47 percent of the total sales of S&P 500 companies come from abroad and the number continues to climb. While buying such stocks might not technically qualify as investing directly overseas, they ll get you most of the way there, says Wayne Lin, a portfolio manager at Legg Mason.
The best way to go this route, some pros say, is to focus on companies that sell to fast-growing emerging markets. For example, consumer giants such as producers of food and household goods generate, on average, twice as much of their sales from emerging markets as the average S&P 500 company, according to UBS Wealth Management. And it s not just firms with household names that know how to sell outside the U.S. Industrial firm Flowserve brings in 73 percent of its revenue by selling things like pumps and valves abroad, and mutual fund giant Invesco gets 69 percent of its revenue overseas. Even tiny HQ Sustainable Maritime, which sells shrimp and tilapia, pulls in nearly 90 percent of its sales and profits from abroad. Such companies provide exposure to the story outside of the U.S. but a bit less downside, says Bob Froehlich, a senior managing director at The Hartford Mutual Funds.
One of the trickiest ways to get into foreign markets is to play their currencies, betting on whether they will go up or down versus the U.S. dollar. The pros message for most investors: Don t try this at home. A year ago many pundits predicted the dollar would decline, weighed down by the trillions printed to bail out the U.S. economy. They were wrong: The euro tanked, while the dollar is up nearly 12 percent this year against a basket of six major currencies. Still, some advisers say foreign currencies used carefully can help diversify portfolios. Rand Spero, a financial planner in Lexington, Mass., puts as much as 10 percent of his clients cash holdings in currency exchange-traded funds like the WisdomTree Dreyfus Chinese Yuan ETF. He thinks the yuan will appreciate over the coming years, and the ETF could offset the toll that a declining dollar would take on his clients purchasing power.
Financial advisers generally agree that before buying yen or yuan, investors should take into account the currency exposure they already have which may be more than they realize. ETFs from iShares, for example, have built-in currency diversification: The funds invest whenever possible in the local shares of foreign stocks, and those companies report their earnings in their home currencies. And some foreign bond funds don t hedge against currency movements, so currency fluctuations affect the funds performance. For many investors, buying such investments could ultimately be simpler than trying to trade specific currencies; as Spero admits, the timing is very hard.