Every Portfolio Needs Foreign Stocks
Despite impressive gains in recent years, many global markets still offer appealing opportunities.
Domestic stocks have done well recently, but foreign stocks have soared. During the five years ending in October 2006, the average international stock fund returned 15.61% annually, about 8 percentage points ahead of the Standard & Poor’s 500-stock index. Can foreign markets continue climbing? Probably. Many foreign economies are growing steadily. And foreign stocks have the wind at their backs because of the falling dollar. As the dollar declines, the value of foreign stocks rises for American investors, and returns of foreign funds climb. With the
Even if the currency experts are wrong and dollar stabilizes, it still pays to own at least some overseas shares. Because foreign stocks sometimes rise when Wall Street is in the dumps, a few overseas issues can help to steady a portfolio. And as the world economy becomes globalized, more and more profitable companies are now located in overseas, even in countries such as
Experts disagree about what percentage of your assets should go in foreign stocks. Some cautious financial advisers recommend allocating 10% of a portfolio to companies abroad, while others suggest 30% or more. The best way to get started is to buy a world fund for at least
part of your assets. A global fund owns stocks in the
Don’t confuse world funds with “foreign” funds, which rarely invest in the
To appreciate how a world fund can gain an edge, consider Oakmark Global, a value fund that has returned 21.7% annually during the past five years. When the S&P was soaring in 1999, Oakmark had 60% of its assets in the
While it often finds the hottest markets, the fund hardly follows the crowd. When many
Currently Oakmark is buying big European pharmaceutical companies. With investors worried that not enough new drugs are coming to market, the pharmaceutical companies have lagged for years. But the fears are quiet overdone, says
Another strong performer is Polaris Global Value. The fund typically holds half its assets in the
Lately, he’s been finding many attractive companies serving
Another standout fund
If your foreign portfolio is already heavy with large-cap stocks, consider Templeton Global Small Company. Portfolio manager Tucker Scott has scored big gains by buying undervalued small and midcap stocks and waiting patiently for them to fulfill their promise. Scott will hold onto stocks for five years or longer. Many companies in the portfolio are European names reporting strong earnings gains. A favorite holding is Vestas Wind Systems, a Danish maker of wind turbines. “Now that oil is so expensive, wind is very cost-competitive,” says Scott. Templeton currently has 20% of its assets in the
Another fund that focuses on smaller stocks is Evergreen Global Opportunity. Portfolio manager Francis Claro seeks growing com-panies that are showing improving performances. In some cases the companies suffered disappointments in the past, and the stocks sank. “We like to find inflection points, where earnings or sales are beginning to improve dramatically,” he says.
Claro is keen on Ashtead Group, a British company that provides rental equipment, such as forklift trucks. The earnings suffered several years ago when the European economy turned sluggish. With construction healthy now, earnings have been climbing, and sales are growing at an annual rate of more than 20%.