Many Americans are getting itchy to venture abroad. Not necessarily to travel outside the U.S., but rather to invest outside the U.S., explains fund expert John Bonnanzio, editor of Fidelity Monitor & Insight.
The temptation to do so is apparent: Almost all of Fidelity’s foreign stock funds (save those most focused on the emerging markets) are in positive territory this year. So we’re being asked, “Why don’t you hold any in your model portfolios?”
Before looking ahead, let’s look back. Over the past full 1, 3, 5 and 10-year periods, our sticking close to “home” has been a good investment decision. In fact, over the past decade, not a single one of Fidelity’s foreign stock funds outpaced the S&P 500. And, very few outperformed any of Fidelity’s domestic stock funds.
While history isn’t necessarily prologue (especially when it comes to investing), we understand that markets ebb and flow. That’s why we’re always watching for upside opportunities abroad — which is a big neighborhood!
In fact, 42% of the world’s public equity market lay outside America. And though Fidelity’s 31 foreign stock funds are only up an average of 9.8% through August, 19 enjoy double-digit gains.
The macro outlook is improving. While the U.S. and Europe should experience similar GDP growth in 2022 and 2023 (we’re far ahead this year), it’s thought that Europe’s recovery could be even faster if it can get a better handle on Covid. (Monetary policy in the eurozone has been supportive, but the region’s divergent needs are a challenge for its central bank.)
Still, some investors are already betting on recovery. After a six-year hiatus, mutual fund flows into Europe from U.S. and Asian investors have turned positive. The pan-European 600 index is up 18.6% this year versus 21.6% for the S&P 500. For the past 12 months, their returns are 31.8% and 31.2%, respectively. And should Europe’s economy rebound like ours, higher share prices should follow accelerating earnings.
As for Japan, optimism springs eternal, but reality has a way of ruining things there. Like so many other countries, Covid is a wild card. And with exports increasingly dependent on Asia, epidemiologists may be better market forecasters than the usual market tacticians.
In considering foreign funds, there are often additional risks including currency exposure, regulatory, geopolitical and greater volatility (think China and the emerging markets). And should you decide to go abroad, it’s also worth noting that global trade has made U.S. and foreign stock funds more correlated.
If your fund holds Apple Computer, for example, roughly two-thirds of its revenue is from outside the U.S. In fact, of the 11 S&P 500 sectors, tech derives the most revenue (57%) from abroad. So if you own a large-cap growth fund where tech is often a third of assets or much more, consider yourself a globally diversified stock investor!
Of course, many U.S. stock funds have plenty of direct foreign stock exposure. We account for that in our model portfolios, which hold no foreign stock funds.
Still, their non-U.S. exposures range from almost 6% for the Select Model to roughly 18% for both the Growth & Income and Income Models. The biggest foreign stock investor is Joel Tillinghast’s Low-Priced Stock (FLPSX), which is 35% invested overseas. That includes a 9% “slug” in the emerging markets.
Though we rate 12 funds OK to Buy (most skew towards Europe’s developed markets), only two more warrant our more enthusiastic Buy rating: Fidelity Overseas (FOSFX) — which we upgraded this month and Global Equity Income (GEI).
With 51% of GEI’s assets in the U.S. (versus 58% for its benchmark), six of its top-10 holdings are U.S. multinationals including Apple, Microsoft and JP Morgan Chase. So if you want to argue that it’s not really a foreign stock fund, we won’t disagree!
But Overseas is the real foreign McCoy. Expertly run by Vincent Montemaggiore, his eye for value stocks has driven the fund into the top 7% of its industry peers. Up 18.1% this year, it’s even more attractive for its below-market risk.
Some foreign developed-market stock funds may be poised for upgrades. But in the uncertain age of Covid, we remain most comfortable keeping the preponderance of our Buy-rated fund picks close to home. For now, it’s better to rely on Fidelity’s managers to leverage the research prowess of their overseas analysts.
