Wiener Goes Global

11/15/2002 12:00 am EST

Focus:

Daniel Wiener

Editor, The Independent Adviser for Vanguard Investors

"I believe that it now makes sense to have a small allocation to foreign shares in most diversified portfolios," says Dan Wiener, editor of The Independent Advisor for Vanguard Investors. "After a long period when US markets outperformed foreign markets the tide turned dramatically in 2002. While foreign markets have underperformed again of late, there is good reason to believe that investors will begin to find foreign stocks even more undervalued than US stocks, and higher prices will ensues. But that doesn’t mean that all foreign funds will benefit. 

“In particular, I’m most interested in Vanguard’s newest foreign fund, International Explorer, which seeks out smaller company shares around the non-US globe. International Explorer uses a team of four stock picking analysts to build its portfolio, with Matthew Dobbs managing the managers. The group works for Schroder Capital Management. This is a small stock fund. It began life independently and was ‘adopted’ by Vanguard this summer. Its mandate leads it to invest in small companies with capitalizations of less than $2.5 billion in markets around the world (ex-US). It is required to own companies in at least three countries and can invest in emerging markets. It also can, and sometimes does, hedge its currency exposure. The fund’s meat-and-potatoes are fast-growers – companies that are growing earnings at a rapid rate. Dobb says that superior earnings growth is the key to the fund’s investment strategy.

“One other thing I like about this fund is its low correlation with US markets. While funds holding larger company shares have correlations ranging from about 60% to 70% over the past three years, International Explorer’s correlation is less than 45%. That improves our diversification and lowers our risk. And that’s good. One note: As with many new Vanguard funds, this one requires a $10,000 minimum for taxable accounts. IRAs can be started with just $1,000.

“We also rate Vanguard’s Global Equity fund as a buy. Manager Jeremy Hosking’s penchant for mid-cap sized companies, rather than global behemoths, has worked in his favor and makes the fund more attractive than other large-cap international funds. Plus, about 34% of assets are in the US, so this is a mild-mannered introduction to foreign shares for more cautious investors. And Global Equity pursues a less volatile path. Its value orientation and global diversification have limited downside risk compared to its international competitors. And despite the fact that foreign funds have outperformed domestic stocks so far in 2002, Global Equity has outperformed all of the foreign-only funds in Vanguard’s stable. Not bad.

“Hosking doesn’t make country bets. Instead, he tries to make money by picking stocks one at a time. He believes that many of his undervalued, mid-cap stocks could be takeover bait. Meanwhile, however, the fund’s portfolio is spread pretty thinly among more than 320 stocks with  its top ten stocks representing just 10% of assets. The fund no longer charges a 1% back-end load, which makes it even more attractive.” Vanguard Funds can be reached at 800-662-7447.

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