Three Ways to Get More Global

12/04/2007 12:00 am EST


Tim Middleton, contributor to MSN Money, says US investors need to invest more money overseas to compensate for slowing economic growth and the dollar's decline.

American economic dominance appears to be waning in this young century. The US share of global gross domestic product is just 29%, according to Morgan Stanley. Europe-Great Britain and the euro zone-is the same size, and emerging markets edge them both out, accounting for 31% of the total.

It's possible the United States is already slipping into recession; downturns are recognized only in retrospect. As investors, however, we don't have to wait. In this decade we've been smart to diversify internationally. Now, we need to shift even more of our dollars over there.

And the sweet spots of foreign investing now are growth stocks in developed markets and industrial stocks in emerging markets.

Harbor International Growth Fund (HIIGX) and Janus Overseas (JAOSX) are superbly managed mutual funds that are heavily committed to both trends. Vanguard FTSE All-World ex-US ETF (AMEX: VEU) is the ETF which, unlike index funds that track Morgan Stanley's EAFE (Europe, Australasia, and Far East) Index, ignores neither emerging markets, which account for 20.5% of assets, nor Canada, which accounts for 5.4%.

Harbor International Growth is ahead 22.1% this year, trouncing the EAFE index as well as domestic stocks.

The Harbor fund is a cheaper clone of Marsico International Opportunities (MIOFX). The brand-name fund charges 1.44% in annual expenses; Harbor charges 1.37%. Marsico's outstanding foreign-stock portfolio manager, Jim Gendelman, owns a fairly concentrated portfolio of about 60 names, nearly all of them very-large-cap growth stocks. But he's been equally aggressive in loading up on stocks sensitive to the global commodity crunch.

Janus Overseas is even more economical (0.91%) and has an even better record than Harbor. It's ahead a resounding 28.6% this year. Over the last decade this fund has delivered returns that rank it among the top 5% of foreign large-cap funds.

This fund's holdings on average are only one-third the size of the Harbor fund, and many of them are concentrated in the most volatile sectors, like technology. The fund is relatively light on energy and industrial materials.

Vanguard FTSE All-World ex-US was created in early March and was up 27.4% through Oct. 31. The index it follows delivered annualized returns over the five years ended Oct. 31 of 27.3%, [handily beating] the EAFE index. Expenses are a bare-bones 0.25%.

We can't escape the dollar in our everyday lives, but we can relegate this depreciating asset to a lesser role in our portfolios and invest in appreciating foreign currencies. If you don't own funds of this type, you are missing the boat. And you're missing it if you don't own enough of them.

The classic asset-allocation model, which is heaviest on domestic stocks, is obsolete when the dollar is not sound. I'm migrating toward an outright majority of foreign equity holdings, with plenty of emerging markets. I think you'll benefit from doing likewise.

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