Investing in International Markets

 

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Investment opportunities exist all around the globe. The most successful US companies continue to experience growth through outstanding management, execution and innovation. At the same time, international markets are opening to US investors as never before.The world is shrinking and becoming more competitive, with many foreign companies adopting business standards and practices similar to those in the United States.

Global investing, which combines both domestic and international securities in a single portfolio, can open the door to investment opportunities worldwide. A global approach gives portfolio managers, acting on behalf of investors, the flexibility to pursue what they believe to be the best investment opportunities in the world — providing an important source of portfolio diversification in the process.

Shrinking World, Growing Opportunity

Globalization, once a vague notion about free trade, is now a reality. The ongoing interaction and integration among people, companies and governments worldwidehas had a profound effect on business, effectively helping the world become better connected and smaller. This process has accelerated during the past two decades,as many governments have adopted free-market economic systems, vastly increasingtheir productivity and investment potential within their countries. This represents opportunity for investors who are willing to participate in the rapid change, innovation and entrepreneurship touched off by globalization.

Another part of the appeal of global investing is the opportunity to access the growth potential of foreign economies and companies. Particularly in emerging markets, favorable demographic trends and rapid social, political and economic change aredriving growth. Global demand trends have shifted toward these countries as they rampup their infrastructure and try to meet the needs of a growing population with rising expectations. As illustrated on the following page, historically, countries with higherGDP growth rates have posted higher investment returns.

GDP Growth and Investment Returns

Sources: Sources: International Monetary Fund, World Economic Outlook Update 2010; MSCI. Investing involves risk. The information shown is for illustrative purposes only and is not meant to represent the performance of any particular investment. Stock market returns are represented by the returns of indexes. Each stock market is represented by the corresponding MSCI country index. It is not possible to invest directly in an index. Total returns are based on returns in US dollars and include reinvestment of all distributions. Past performance is no guarantee of future results

Beyond Our Borders

Let us revisit the historical case for investing beyond US borders. As of year-end 2009, publicly traded companies in the United States comprised 44% of the global market, down from 66% in 1970 (see pie charts below). This trend is expected to continue. Globalization and innovation are aiding advancements in all corners of the world — from healthcare, technology and agricultural breakthroughs to new consumer products and the rapid build-up of infrastructure. Companies in all regions and of all sizes are participating in these dynamic growth trends.

Global Market Share Over Time

Source: Standard & Poor’s; MSCI. US companies represented by the S&P 500 Index. Non-US companies represented by the MSCI EAFE Index.

The growth and development of foreign economies and financial markets have made them both attractive and accessible to US investors, creating investment opportunities and prompting capital flows overseas. By ignoring investment prospects outside the United States, investors would miss out on more than half of the investible stock market opportunities in the world, including some businesses and subsectors that do not exist domestically.

Global Market Performance

Many major foreign markets have outperformed US stocks in recent years. In the past decade, the United States could be counted among the top 10 performing markets only once. Increasing exposure to international stocks can help to enhance returns while simultaneously reducing risk through diversification.

US Market Returns
Sources: MSCI; Lipper, Inc. Investing involves risk. The information shown is for illustrative purposes only and is not meant to represent the performance of any particular investment. Stock market returns are represented by the returns of indices and are ranked on an annual total return basis. Each stock market is represented by the corresponding MSCI country index. It is not possible to invest directly in an index. Total returns are based on returns in US dollars and include reinvestment of all distributions. Past performance is no guarantee of future results.

Diversifying Globally

Blending international and US market exposure is one way to achieve greater diversification, a key strategy for reducing a portfolio’s overall risk profile. Since economic cycles in foreign markets often differ from those driving US markets, investing in foreign securities helps to mitigate risk better than an all-domestic portfolio. Individual markets historically have not behaved similarly to one another. As some markets sag, others tend to perform well. Few, if any, investors can successfully predict which markets will outperform, when and for how long. A diversified portfolio lets investors participate in market upside while moderating exposure to declines in some markets

Modern Portfolio Theory tells us that, by carefully allocating capital to assets that historically are not perfectly correlated with one another, investors can potentially reduce overall portfolio risk. This is true even if the assets added to a US-only portfolio are potentially more risky. See below for the risk/reward characteristics of various global markets.

Risk and Return: January 1, 2000-December 31, 2009

Sources:  Lipper, Inc. Investing involves risk. The information shown is for illustrative purposes only and is not meant to represent the performance of any particular investment. Each stock market is represented by the corresponding MSCI country index. It is not possible to invest directly in an index. Total returns are reflective of US dollar returns and include reinvestment of dividends. Past performance does not guarantee future results. Standard deviation is a statistical measure of the volatility of an investment’s returns.

The Big Picture

With globalization tying the world closer together, opportunities for investors can be significant. Most asset allocation plans call for a diversified portfolio of foreign and domestic stocks and bonds.

Global Mutual Funds

A professionally managed portfolio of global securities is a good way to gain accessto markets around the world. A global mutual fund can offer relatively low costs, high transparency and lower risk through its inherent diversification. Shareholders alsobenefit from the insights and expertise of a team of professional money managers,who scour the globe to find opportunities they believe can deliver value to investors within a diversified portfolio of securities. A mutual fund with a global strategy can bea more convenient fit within an asset allocation plan than the more complicated taskof mixing and matching domestic and international securities or funds.

Investors in a global fund also may realize greater consistency in portfolio management, since a unified team oversees the investment approach for the US and international portions of the portfolio. In some cases, a fund may benefit from the expertise of specialized teams focused on a specific region. In addition, though portfolio managers have some flexibility to be opportunistic on behalf of investors, their adjustments tendto be moderate and tactical, fitting within the framework of a disciplined investment approach. These adjustments should not significantly recalibrate an investor’s overall asset allocation plan. Such discipline can be more difficult to achieve when constructing your own portfolio of global investments.

A Word About Risk

Diversifying a portfolio to include international securities does not eliminate the risk of investment loss. International investing involves additional risks, including risks relatedto foreign currencies, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are magnified for investments in emerging/developing markets or smaller capital markets. Investors should discuss the risks of global investing with their financial professionals before investing.

 

The information shown herein is for illustrative purposes only and is not meant to represent the performance of any particular investment. Diversification does not guarantee a profit or protect against a loss. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are often heightened for investments in emerging/developing markets.

This material is provided as an educational tool and is not meant as an investment recommendation. The information contained in this material is in part derived from third-party sources deemed reliable, but Shenouda does not guarantee the completeness or accuracy of the information.

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