Foreign Funds for the Adventurous ...
CHICAGO — The US stock market is falling and your retirement savings are following its trend line downward. Where do you find safety?
Foreign stocks, that is.
Investors cannot expect overseas equities to shield them completely from the New York's declining market. In recent days many foreign markets, especially established ones in Europe, followed Wall Street into the tank.
But experts say exposure to overseas equities can reduce volatility in your portfolio. Some big investment houses recommend putting as much as 25 percent or more of your money into foreign equity funds.
"We have our most aggressive commitment ever to non-US markets and suggest that US-based equity investors put about 35 percent of equity portfolio outside the US," says Douglas Johnson, senior international investment strategist at Merrill Lynch & Co. in New York.
Risky time to move?
For cautious investors, this may seem a dicey time to head overseas. Broad-based international mutual funds have lagged behind US markets for years.
More immediately, the backwash from Wall Street's recent tumble has swept over many big foreign markets like London, Paris, Bonn, Tokyo, and Hong Kong. With the US Federal Reserve beginning to raise interest rates, investors in larger and older markets tend to echo New York's cries of "SELL!"
But after a global downturn, the major foreign markets tend to veer away from Wall Street. And some large exchanges and many smaller emerging markets have remained blissfully indifferent to the throes of New York.
"Not only could you get higher returns overseas but you diversify outside the US into markets that don't walk lock-step with New York," says Leila Heckman, managing director of Smith Barney's global asset allocation group in New York.
Investment advisers generally recommend putting about 70 percent of foreign holdings into mutual funds that span the full spectrum of overseas markets. (See chart for some top funds.)
Many analysts suggest putting the rest of your foreign assets into emerging-market funds, which are volatile but promise higher long-term gains. Both types of funds rely on broad diversification to minimize currency and market volatility.
But both also will invest in many nations - from France and Britain to Hong Kong and Mexico - that historically march more or less in step with Wall Street.
So bolder investors might take another tack that goes further to reduce exposure to a New York swoon: Invest in individual countries that offer the highest earnings per share and also tend to buck the trend on Wall Street, say analysts.
Among countries that today offer good value stocks with low correlations to New York are the established markets of Italy and Japan and the fledgling exchanges in Brazil, Thailand, and South Korea, say analysts.
Investors can grab on to the fortunes of these markets through many open- and closed-end mutual funds. But be careful. South Korea and Thailand, especially, have shown serious instability.
Japan looks especially attractive to some strategists.
"One market which has had very, very low correlations is Japan; that is the classic one," says Earl Osborn, at Bingham, Osborn & Scarborough, an advisory firm in San Francisco.
For the past 15 years the Tokyo market has boomed when Wall Street has fizzled, and vice versa, says Mr. Osborn. "Japan has been a big commitment of ours for several months," he says.