Are International Investments Still Good Plays?

Are International Investments Still Good Plays? Leckey, Andrew - Successful Investing December 30, 2009 The siren call of faraway places with strange-sounding names is again beckoning investors. The problem is that an investor's ship could just as easily run aground on the rocks as discover the foreign treasure it did in 2009. World equity mutual funds gained an average of 42 percent in 2009, a full 10 percent better than the average U.S. diversified equity fund, according to Lipper Inc. Meanwhile, led by Latin America and China, emerging markets funds rose an average of 74 percent. Even European funds managed to outperform the results of the average American fund by several percentage points. There is still promise abroad in the coming year, yet don't get carried away. Dynamic years are often been followed by dismal ones in the quixotic world investment mix. It increasingly makes sense to include international stocks or mutual funds as part of your personal portfolio, but you should do so in moderation. "The distorted performance figures for 2009 were a response to a horrible 2008, so what part of those great results is noise and what part is a signal?" asked Jeff Tjornehoj, senior research analyst with Lipper. "While it feels like overseas investments are likely to outperform the U.S. once again in 2010, I don't think we're settled into a pattern." Expect a sideways market period if there isn't a global recovery sharp enough to jolt the markets back to life, warned Tjornehoj. He fears that loans may not grow and a double-dip recession could be unavoidable. "A diversified international fund would be my suggestion," said Tjornehoj. "I'd further suggest that the best time to get into emerging markets is after a crisis, and I'd be much more worried about investing when things are quiet and looking up." An example of a broad index fund with more than 1,700 stocks of developed and emerging market companies is the $25.4 billion Vanguard Total International Stock Index Fund (VGTSX), up 37 percent in 2009. That "no-load" (no sales charge) fund requires a $3,000 minimum initial investment. Maybe because they're truer believers than Tjornehoj, international fund managers are bullish on 2010 overseas prospects. "There will be a continuation of the rally because earnings are going to recover," predicted Alex Tedder, senior portfolio manager of the $1.5 billion American Century International Growth Fund (TWIEX), up 34 percent in 2009. "But it will be much more differentiated among companies because investors will focus on whether a company has a sustainable strategy and sustainable earnings." Especially attractive will be global emerging market companies whose stocks trade like those of developed markets, said Tedder, such as South Korea's Samsung Electronics Co. Ltd., Brazilian iron ore producer Vale and South Korea's Hyundai Motor Co. A second tier would be companies that are more local but possess strong franchises, such as Banco Santander Brasil, the Brazilian bank spun off as an initial public offering from Spain's Banco Santander SA. "When it comes to the developed markets, the U.S. always leads the rest of the world, and this time will be no different," said Tedder, whose no-load fund requires a $2,500 initial investment. "It's getting better, not worse, at this point and it will again be led by the U.S." Economic recovery benefits those companies with the strongest franchises because they'll be able to capitalize on their existing strengths, he said. Prime examples are Hitachi Construction Machinery Co. Ltd. in Japan that makes construction machinery and Taiwan's HonHai Precision Industry Co. that manufactures parts for the Apple iPhone and assembles them as well. More than half of American Century International Growth Fund's portfolio of about 150 stocks is invested in the United Kingdom and Europe; one-third in Asia; and the rest in Latin America and other countries. Australian metals and energy producer BHP Billiton Limited is the largest stock holding. Others include Italian oil and gas contractor Saipem, Banco Santander and Vale. "Global population growth has been doubling every 50 years or so and the bulk of that growth is outside the developed countries," pointed out Chad Deakins, portfolio manager of the $878 million RidgeWorth International Equity Fund (SIIIX), up 28 percent in 2009. "Emerging markets experience industrialization, urbanization, growing wealth and high productivity growth." He especially likes prospects in Brazil because its population is just hitting the age of productivity, while he feels India and China stocks are already fairly valued. It is also worth noting that a lot of companies in developed markets have exposure to emerging markets, he said, a good example being Coca-Cola Co., which now derives the bulk of its sales from outside the U.S. Three-fourths of the nearly 800-stock RidgeWorth International Equity Fund is in the U.K. and Western Europe, with the remainder in Asia. Top names include Spanish telecommunications firm Telefonica SA, Italy's Eni oil and gas company, German electronics and electrical engineering firm Siemens AG and French oil producer Total SA. "The world experienced the first truly global synchronized recession, and now it is having the first global synchronized recovery," said Deakins, whose 5.75 percent load fund requires a $2,000 minimum investment. "Selectivity will be more important now, because with all companies having earnings again, you must buy the cheapest earnings -- meaning stocks with the most attractive valuations." (Andrew Leckey answers questions only through the column. Address inquiries to Andrew Leckey, 555 N. Central Ave., Suite 302, Phoenix, Ariz. 85004-1248, or by e-mail at andrewinv@aol.com.)