As Asian economies continue to convulse, many American investors are wondering what to do with the international portions of their portfolios:
Should they increase them, buying at today’s depressed prices, sit tight, or sell and retreat to home turf?
The best course, many experts say, may be to find some middle ground: Trim exposure to the ailing Asian Tigers but keep investing in the international arena for diversification benefits.
“We’re not totally walking away (from the international sector), but we’re taking it down a notch,” said Timothy Schlindwein, a fee-only investment counselor based in Chicago.
Prior to the outbreak of Asian flu last year, his firm often recommended devoting 10 to 15 percent of a portfolio to international mutual funds, a fairly conservative stance. “Today, we’re in the 5 to 10 percent range,” he said.
Such modest pullbacks seem to be the name of the game now.
“People have not been panicking and bailing out of international completely . . . but particularly those who invested in Asian markets . . . cut back exposure over the last half of last year,” said Steven E. Norwitz, a vice president at Baltimore-based mutual fund firm T. Rowe Price Associates Inc.
The shift to sidelines appears to be a nationwide phenomenon. In October and November, as more money flowed into equity mutual funds overall, investors took more money out of international funds than they put in, according to the Investment Company Institute, a Washington-based mutual fund trade group. The net outflow from funds with strictly foreign holdings was $527 million in October and $1.12 billion in November.
Indeed, international stock funds are capturing a smaller piece of equity mutual fund investment–just 11 percent of the total in the first 11 months of 1997, down from a 13 percent share in 1996.
“Those investors who have been diversified internationally over the last three years have seen it drag on their portfolios,” Norwitz said. “But at some point, history would suggest these things turn–it’s just hard to time it.”
The drag has been significant. World equity funds had an average annualized return of 7.30 percent during the three years ended Dec. 31, while general domestic equity funds more than tripled that return, posting an average annualized gain of 25 percent, according to Lipper Analytical Services Inc. in Summit, N.J. (Lipper’s “world” category includes international funds, which are all-foreign; global funds, which are a U.S.-foreign blend; regional foreign funds, and gold funds.)
In 1997, the contrast was even starker: a 0.42 return for world funds versus a 24.36 return for general funds.
Waiting for a rebound in international funds will take patience, experts say.
“You need to be in for the long term if you go to international,” noted Mark Bell, a Chicago-based fee-only financial adviser. “You need to take a page out of (billionaire investor) Warren Buffett’s book or from other investors who hold on for decades or a minimum of five years. It’s treacherous if you do not.”
Meanwhile, it may pay to take still another cue from Buffett, according to A. Michael Lipper, president of Lipper Analytical.
“One of the things Warren Buffett and others have taught us is that there are relative bargains at the end of downward volatility, but the problem with any form of bargain-hunting is you may be early,” he said. “So you want to look at the ones that have done the worst. . . .
“At the extremes are China, the Pacific Rim except Japan, the Pacific Rim with Japan, and Canada, with fairly significant downturns,” he said. “Those would be the areas I’d be doing my research on.”
In fact, a number of financial experts think this is a good time to invest overseas, if only to offset recent depreciation and rebalance a portfolio.
“Say you had a 10 percent allocation for international. Given recent events, it’s probably down to 7 or 8 percent now, and to maintain the 10 percent, you need to put more money in, and that makes sense,” said Tricia O. Rothschild, international funds editor at Morningstar Mutual Funds newsletter.
Morningstar, like Lipper, sees promise in funds that are currently out of favor, such as Asia/Pacific funds.
Others prefer less-risky choices.
“While Asia remains volatile, we think there are still good opportunities in Europe and Latin America,” said Norwitz of T. Rowe Price.
“When you look at valuations overseas, particularly in Europe, they are still attractive relative to the U.S. market, and the interest-rate markets overseas look good,” he said. “We think earnings will improve in Europe and Japan.”
Nevertheless, many financial advisers say only the most aggressive, risk-tolerant investors should venture into so-called sector funds, or those focusing on a particular region or nation.
“You can lose a fortune in those, so they should be a pretty modest part of overall international,” Bell said.
“We like diversified international no-load mutual funds and paying fund managers to make decisions as to which countries to put money into,” he said. “You can also buy diversified emerging-market funds, which we advocate.”
The generally accepted rationale for taking on the extra risks of international investment is twofold: A potential for higher returns and a potential for a cushion, based on the theory that when one market is down, another will be up.
But not everyone buys into that thinking. L. Roy Papp, managing partner of a Phoenix-based mutual fund and investment-counseling firm, thinks sufficient diversification can be achieved by investing in mutual funds comprising U.S. firms with substantial overseas activities and to a lesser extent, foreign firms that are publicly traded in the U.S.
Potential risks with foreign investments, he said, include currency risk on the way in and on the way out; the possibility of rigged local markets; variations in the way corporate earnings are stated; possible political instability, and loss of Securities and Exchange Commission protection.
“I think the American market is a lot safer,” he said.
