Going Global with Vanguard

11/25/2005 12:00 am EST

Focus:

Daniel Wiener

Editor, The Independent Adviser for Vanguard Investors

"Foreign stock markets are poised to outperform domestic markets for the fourth year in a row," notes Vanguard fund expert Dan Wiener. "And today, the situation begs for a greater allocation to foreign stocks than in many years past." Here's his top ideas for global diversification.

""Should you invest in overseas markets? I have never believed it’s an either/or decision and over the almost 15 years that I’ve been writing this letter my enthusiasm for foreign investments has waxed and waned. I believe that’s appropriate given the economic and investment realities here and abroad including relative valuations, as well as the secondary consideration that one must give, from time to time, to the dollar and its relationship to other currencies.

"Sometimes, foreign markets (and particularly individual companies in those markets) are demonstrably undervalued relative to US markets. Sometimes the currency translations augur for a stake in non-dollar investments. And sometimes, economic recovery and progress is better in foreign lands. By the same token, there are big foreign markets (can you say Japan?) that for many years cried out to be avoided, and markets that now appear quite attractive (Japan again, given the economic and societal changes afoot there).

"But how you, as a US investor, view your overseas investments may be the most important part of your asset allocation equation. Remember, this is a global economy we now live in. So, investing in foreign stock markets is akin to adding a tilt to our domestic-based portfolio. That being said,  in fact, none other than Gus Sauter, Vanguard’s chief investment officer, and head of the indexing group, has made emerging markets a big piece of his own portfolio. Sauter recently told Money magazine that he has 30% of his equity assets invested overseas, and two-thirds of that money is in emerging markets.

" For a long time I steered clear of Vanguard Emerging Markets Stock Index (VEIEX) because of its volatile nature. It suffered a 53.9% decline in 1997-1998 that took almost five-and-a-half years to recover from. You have to buy this fund with your eyes wide open. Currently, South Korea represent the greatest allocation at 20% of assets followed by Taiwan (16%), Brazil (12%), South Africa (12%), China (9%) and Mexico (7%). Clearly, the fate of just one of these markets can have a big impact on the overall fund’s returns, and as you may have noticed these are countries with plenty of opportunities for quick changes in fortunes. With high load fees, you better really want this fund before you buy in. I want it, and own it in quantity in three of my Model Portfolios as well as my personal account. One further thought: The Vanguard Emerging Markets VIPER shares (VWO ASE) are a good alternative for those with larger sums to invest. You’ll pay a brokerage fee, but avoid the front- and back-end loads and pay lower operating expenses as well.

"Since re-opening in October 2004 Vanguard Global Equity (VHGEX) has blossomed from 300 to 500-plus stocks, performance remains fairly good and I’m still a believer in this fund’s value-oriented, global approach to stocks. Though the number has changed slightly over time, the basic objective here is to have 40% of assets invested in US stocks and the rest in overseas shares. Not surprisingly, companies in Japan and the UK make up the biggest foreign market allocations with Canada next in line. Global Equity combines several factors that make it a worthy offering. Not only does it span the globe looking for bargains, but it has a value tilt, which protects it from the frothiness often found in growth markets, and it is focused on mid-sized companies as opposed to foreign giants.

"While uncertainty is almost a given when talking about Japan and its economy, the country surely seems to be on the right track as its reforms are beginning to take hold and Japanese companies become, once again, more competitive. Yes, Vanguard Pacific Stock Index (VPACX) is called a ‘Pacific’ fund but it’s really a Japan fund with some satellite countries and stocks orbiting around the periphery. Almost 75% of assets are in Japanese stocks and the bulk of the remainder are invested in Australia, principally in the guise of a couple of large banks. The final 8% or so of assets are invested in Hong Kong and Singapore with a minuscule allocation to New Zealand. Historically, risk here has been incredibly high, with values declining 50% or more twice in the past decade. That’s not surprising given how poorly the Tokyo market has performed. But, Japan is on the mend and I believe this is probably the first time in many, many years when it pays to have money in this part of the global market. If you want greater exposure to Japan, this is the fund for you."

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