Investing Overseas Balances Portfolio
It's a good time to diversify abroad, brokers say
| NEW YORK
With American stock indexes near record levels yet showing signs of weakness, some experts say it's time to consider offsetting domestic stocks with overseas investments.
A number of brokerage houses are making this case.
"We believe that portfolio managers would do well to internationalize their portfolios further," concludes Salomon Brothers Inc. in a new report to clients.
Everen Securities goes further. In addition to "stocks," "bonds," and "cash," the Chicago investment house has added a new category into its model investment plan: "foreign stocks." Investors, whether following conservative or aggressive plans, should have at least 15 percent of their assets in stocks outside the United States, the firm recommends.
Everen also one-ups many of its peers by offering a separate model portfolio for people who are keen on international diversification. Its "global portfolio" currently puts 22 percent of assets into foreign stocks.
Should you take such a global ride?
Having assets in foreign stocks or mutual funds is essential not just for a well-rounded long-range investment plan but also to offset possible gyrations in US markets, argues Rao Chalasani, Everen's chief investment strategist.
Larry Wachtel, a market analyst at Prudential Securities Inc. in New York, says holding some overseas stock "is important in terms of diversification." Most American stock investment continues to pour into the domestic market, he notes. But savvy investors seek to hedge their US investments at a time of uncertainty, such as now, he says.
Some caution is in order, though. For one thing, overseas returns haven't been stellar in recent years.
International-stock funds averaged 9.7 percent annual returns during the 10-year period ending last December, according to Morningstar Inc., a Chicago financial-services firm. That's not bad, but well below US stock funds, at 13.3 percent. The most conservative overseas sector, European funds, came in just under 10 percent.
Moreover, holding foreign funds presents some risks not found in the US. Currency gyrations can reduce the US value of foreign stocks. Political or economic instabilities abroad can inhibit returns or trigger losses.
Still, experts see reasons why "going international" makes sense now:
* Many economists foresee steady global economic growth in 1997, which could propel international markets. The economic department of the United Nations forecasts world economic growth of 3 percent this year. Developed countries should grow 2.5 percent; growth in developing countries should be 6 percent.
* Valuation levels are currently lower overseas, with large-company stocks trading at 12 to 16 times estimated earnings for 1997, compared with 18 to 19 times estimated earnings in the US. (Foreign stocks aren't necessarily cheap by historical standards, though.)
* Many on Wall Street predict a US market slump of 5 to 20 percent or more. Concerns here stem partly from the length of the current bull market, now more than 6 years old. Most overseas markets have only shown upward momentum for the past few years.
For inexperienced or new investors, going global can be as easy as dialing the 800 number of a mutual-fund family. Some fund groups - Franklin Templeton, for example - have a heavy concentration in international funds. Most major mutual fund groups now have at least one international fund. In all, more than 300 mutual funds have a global or international component, Morningstar analysts say.
These funds fall into several categories, notes the Investment Company Institute, the main trade group for the fund industry. "International" funds invest in companies outside the US; "global" funds invest in both overseas and US companies. And some funds focus on specific regions or countries.
One tip experts give: When buying a global mutual fund, it's especially useful to look for funds with high ratings from services such as Morningstar and Value Line. Note that Morningstar's leaders, shown the accompanying chart, get just average ratings from Value Line.
One way to go global without buying either individual stocks or mutual fund shares is through "webs" - world equity benchmark shares. Like an index mutual fund, a web will mirror the performance of the stock market in a certain country or region. Webs sell like stocks on major US exchanges.
What countries are most promising for 1997? Europe, which saw its markets rise 20 percent on average last year, is expected to see more modest gains. Companies there are restructuring, which could help. Some analysts expect markets in Britain, Germany, Spain, Scandinavia, and possibly France to do well. But views differ. Mr. Chalasani likes Portugal, Italy, Australia, Argentina, China, Indonesia, and Canada.