When Risk Is Home-Grown, Is It Time to Look Abroad?
WHEN it comes to their investments, many Americans associate the word “foreign” with high risk. Advisers routinely recommend that foreign holdings amount to no more than 10 or 20 percent of a stock portfolio. Otherwise, the theory goes, investors risk heavy losses in the event of a foreign crisis, like the Asian financial upheaval of the 1990s.
But the latest round of world financial problems started at home, in the United States, as a result of the subprime mortgage crisis. This time, the United States has exported volatility to the rest of the world. At least that’s the argument of some financial experts, who say that individual investors should not necessarily look at the United States as a haven. Instead, they say that investors should hold a substantial percentage of their portfolios in non-American companies, through mutual funds or exchange-traded funds.
“If the recent volatility in the United States is what scares you into doing the right thing, great,” says Uri Landesman, head of global growth and international at ING Americas, a subsidiary of the Dutch bank. “But it’s what you should have been doing all along.”
Mr. Landesman, who is based in New York and oversees about $4.3 billion in investments, is keen on investing in Britain, but not Continental Europe or Japan. And he is enthusiastic about technology companies in Taiwan, where he has invested 5 to 6 percent of the portfolio he oversees. He urges caution in investing in places like Thailand or Turkey, which have been facing possible political crises. Mr. Landesman contends that individual investors should have 40 to 50 percent of their stock portfolios in international investments. “Buy a fund that owns non-U.S. stocks that does its own allocation,” he says. “You can also buy an E.T.F. in a particular country or a fund in a particular country.”
He says he does not believe that individuals should try to buy foreign equities by themselves. “Most people do not want to watch a screen all day,” he says.
Vanguard, the mutual fund group, says that only about 11 percent of the typical 401(k) retirement plan is invested in international equities. Ellen Rinaldi, principal for investment counseling and research at Vanguard in Malvern, Pa., cautions that investors should not make rash moves just because of domestic market volatility, but adds that it makes sense for average investors to have 20 percent of their holdings in non-American stock funds.
“Moving to 20 percent would be a significant increase and a good diversification,” Ms. Rinaldi says.
But it does not make sense, in her view, for investors to go beyond about 30 percent. “As you move up, and if you go over 30 percent, you’re taking on additional risk and expense, so you’re not getting as much diversification benefit,” she says. Her firm offers a variety of international mutual funds like Total International, Pacific, Emerging Markets and Developed Markets. Emerging markets have traditionally been viewed as the riskiest in the world, but over the past several years, they have attracted a flood of capital and have performed strongly. “These aren’t your father’s emerging markets,” says Arthur P. Steinmetz, who manages $20 billion in assets at OppenheimerFunds, $5 billion of which is invested in emerging markets.
Mr. Steinmetz, based in New York, says that most emerging markets are far more sophisticated and stable than they were 10 years ago, when the Asian financial crisis hit. He notes that Brazil, for example, has $160 billion in foreign exchange reserves and that its foreign debt, once an issue of concern, has shrunk dramatically. It is much better able to withstand volatility. “The sandbags that Brazil has around it against global flooding are much higher than they used to be,” he says.
Although Mr. Steinmetz says that now is a good time to buy emerging-market equities, Antoine van Agtmael, head of Emerging Markets Management in Arlington, Va., says that recent run-ups in their share prices mean that investors should wait.
“Emerging markets are fully priced,” says Mr. van Agtmael, whose firm manages a family of funds with more than $20 billion in emerging-market investments. “You don’t want to go into these markets after they’ve had a big run.”
He says he is convinced that emerging markets are a good bet over the next five years, just not in coming months.
Although Mr. Steinmetz and Mr. van Agtmael may differ over timing, they share the view that further expected declines in the value of the dollar and other macroeconomic adjustments needed to reduce American borrowing in the world make investing in foreign securities increasingly important. “I would argue that having exposure to international securities denominated in currencies other than the United States dollar is a useful hedge,” Mr. Steinmetz says. “Investors will have an asset that is appreciating,” he said, even if the value of United States-based assets declines.
Mr. van Agtmael, the author of “The Emerging Markets Century,” is credited with coining the term “emerging markets” in the early 1980s. He argues that structural changes in emerging markets mean that they are stable enough for average American investors.
One such change is the investment opportunity offered by big infrastructure projects. “Emerging markets now invest more in infrastructure than the United States,” he says, citing the recent steam-pipe explosion in Manhattan and the bridge collapse in Minneapolis. “That was not true just a couple of years ago. Their investments are going up at a rate of about 20 percent while ours has been growing at about 5 to 6 percent.”
Although the American market is traditionally regarded as being so vast and deep that it is more stable than emerging countries’ markets, those countries have made big strides in managing their foreign exchange reserves, current account deficits and currency positions. “They’ve learned their lessons,” Mr. van Agtmael says. “Their economic policies have become a lot sounder than they were before and they have a hell of a lot more money.”
Mr. van Agtmael is clearly more aggressive about emerging markets than many other investment professionals and argues that if emerging markets represent 23 percent of the world economy, investors should have at least 20 percent of their portfolios in these markets. “That’s neutral,” he says.
And he has profited from his convictions: his fund has gained more than 30 percent in value over each of the past three years.
PATRICK DORSEY, the director of equity research at Morningstar in Chicago, which rates mutual funds, says there is no one international investment percentage that all investors should embrace. “It depends on age, risk tolerance and a whole list of factors,” Mr. Dorsey says.
But he agrees with money managers that Americans are “overinvested” in their home market. “It’s a familiarity bias,” he says. “But it may very well be that our home market is the riskiest. It’s a mistake for investors to always think that foreign investments are always riskier.”
WHEN it comes to their investments, many Americans associate the word “foreign” with high risk. Advisers routinely recommend that foreign holdings amount to no more than 10 or 20 percent of a stock portfolio. Otherwise, the theory goes, investors risk heavy losses in the event of a foreign crisis, like the Asian financial upheaval of the 1990s.
But the latest round of world financial problems started at home, in the United States, as a result of the subprime mortgage crisis. This time, the United States has exported volatility to the rest of the world. At least that’s the argument of some financial experts, who say that individual investors should not necessarily look at the United States as a haven. Instead, they say that investors should hold a substantial percentage of their portfolios in non-American companies, through mutual funds or exchange-traded funds.
“If the recent volatility in the United States is what scares you into doing the right thing, great,” says Uri Landesman, head of global growth and international at ING Americas, a subsidiary of the Dutch bank. “But it’s what you should have been doing all along.”
Mr. Landesman, who is based in New York and oversees about $4.3 billion in investments, is keen on investing in Britain, but not Continental Europe or Japan. And he is enthusiastic about technology companies in Taiwan, where he has invested 5 to 6 percent of the portfolio he oversees. He urges caution in investing in places like Thailand or Turkey, which have been facing possible political crises. Mr. Landesman contends that individual investors should have 40 to 50 percent of their stock portfolios in international investments. “Buy a fund that owns non-U.S. stocks that does its own allocation,” he says. “You can also buy an E.T.F. in a particular country or a fund in a particular country.”
He says he does not believe that individuals should try to buy foreign equities by themselves. “Most people do not want to watch a screen all day,” he says.
Vanguard, the mutual fund group, says that only about 11 percent of the typical 401(k) retirement plan is invested in international equities. Ellen Rinaldi, principal for investment counseling and research at Vanguard in Malvern, Pa., cautions that investors should not make rash moves just because of domestic market volatility, but adds that it makes sense for average investors to have 20 percent of their holdings in non-American stock funds.
“Moving to 20 percent would be a significant increase and a good diversification,” Ms. Rinaldi says.
But it does not make sense, in her view, for investors to go beyond about 30 percent. “As you move up, and if you go over 30 percent, you’re taking on additional risk and expense, so you’re not getting as much diversification benefit,” she says. Her firm offers a variety of international mutual funds like Total International, Pacific, Emerging Markets and Developed Markets. Emerging markets have traditionally been viewed as the riskiest in the world, but over the past several years, they have attracted a flood of capital and have performed strongly. “These aren’t your father’s emerging markets,” says Arthur P. Steinmetz, who manages $20 billion in assets at OppenheimerFunds, $5 billion of which is invested in emerging markets.
Mr. Steinmetz, based in New York, says that most emerging markets are far more sophisticated and stable than they were 10 years ago, when the Asian financial crisis hit. He notes that Brazil, for example, has $160 billion in foreign exchange reserves and that its foreign debt, once an issue of concern, has shrunk dramatically. It is much better able to withstand volatility. “The sandbags that Brazil has around it against global flooding are much higher than they used to be,” he says.
Although Mr. Steinmetz says that now is a good time to buy emerging-market equities, Antoine van Agtmael, head of Emerging Markets Management in Arlington, Va., says that recent run-ups in their share prices mean that investors should wait.
“Emerging markets are fully priced,” says Mr. van Agtmael, whose firm manages a family of funds with more than $20 billion in emerging-market investments. “You don’t want to go into these markets after they’ve had a big run.”
He says he is convinced that emerging markets are a good bet over the next five years, just not in coming months.
Although Mr. Steinmetz and Mr. van Agtmael may differ over timing, they share the view that further expected declines in the value of the dollar and other macroeconomic adjustments needed to reduce American borrowing in the world make investing in foreign securities increasingly important. “I would argue that having exposure to international securities denominated in currencies other than the United States dollar is a useful hedge,” Mr. Steinmetz says. “Investors will have an asset that is appreciating,” he said, even if the value of United States-based assets declines.
Mr. van Agtmael, the author of “The Emerging Markets Century,” is credited with coining the term “emerging markets” in the early 1980s. He argues that structural changes in emerging markets mean that they are stable enough for average American investors.
One such change is the investment opportunity offered by big infrastructure projects. “Emerging markets now invest more in infrastructure than the United States,” he says, citing the recent steam-pipe explosion in Manhattan and the bridge collapse in Minneapolis. “That was not true just a couple of years ago. Their investments are going up at a rate of about 20 percent while ours has been growing at about 5 to 6 percent.”
Although the American market is traditionally regarded as being so vast and deep that it is more stable than emerging countries’ markets, those countries have made big strides in managing their foreign exchange reserves, current account deficits and currency positions. “They’ve learned their lessons,” Mr. van Agtmael says. “Their economic policies have become a lot sounder than they were before and they have a hell of a lot more money.”
Mr. van Agtmael is clearly more aggressive about emerging markets than many other investment professionals and argues that if emerging markets represent 23 percent of the world economy, investors should have at least 20 percent of their portfolios in these markets. “That’s neutral,” he says.
And he has profited from his convictions: his fund has gained more than 30 percent in value over each of the past three years.
PATRICK DORSEY, the director of equity research at Morningstar in Chicago, which rates mutual funds, says there is no one international investment percentage that all investors should embrace. “It depends on age, risk tolerance and a whole list of factors,” Mr. Dorsey says.
But he agrees with money managers that Americans are “overinvested” in their home market. “It’s a familiarity bias,” he says. “But it may very well be that our home market is the riskiest. It’s a mistake for investors to always think that foreign investments are always riskier.”