Global funds promising

Returns of foreign stock funds fell during the first half of the year amid the dollar’s resurgence against other major currencies, but experts say that’s no reason to shy away from international equities.

In fact, with most U.S. investors deeply underexposed to foreign stocks, the current attractive valuations of overseas companies relative to domestic equities underscore the wisdom of taking a global approach. If you’ve been drawing an artificial line at your own country’s border, you could be shortchanging yourself.

“The U.S. market is only about half the world market. So if you don’t invest internationally, it’s like having a car that only does left turns,” said Reiner Triltsch, managing director and head of international investments at U.S. Trust. “You leave a lot of opportunity on the table. And if you look for companies that are best in class, very often you find those are not U.S. companies.”

Global funds have been well-positioned over the last couple years, as international equities outperformed domestic stocks. And professional investors like Triltsch say a number of factors, including improving fundamentals in Europe and Japan relative to the United States, suggest there’s potential for further good returns in the future.

There are many mutual fund options for people looking to invest abroad. The most narrowly focused offerings invest in single countries or regions. When financial professionals speak of international funds, they’re often referring to those that invest only in stocks from countries outside the United States. Global funds are the most broadly diversified, in that they consider the whole world to be fair game, and usually hold both domestic and foreign stocks.

According to Standard & Poor’s, the average international stock fund gained 0.57 percent during the first six months of 2005, while the average global equity portfolio, which also invests in U.S. stocks, shed 0.19 percent. During the second quarter, however, international stock funds rose 0.25 percent, while global stock funds rose 1.4 percent.

Some of this disparity has to do with the rising value of the dollar, which has staged a comeback after a three-year decline. Since bottoming out in 2004, the greenback has gained about 5 percent against the yen and 10 percent against the euro, S&P found.

Most global equity markets have posted gains so far this year in local currencies, but many have declined in dollar terms. For example, European markets gained an average 7 percent in euros, but dropped 5 percent in dollars, according to S&P.

This complicates the decision about how much and how broadly to invest overseas in the face of soaring oil prices, rising interest rates and a possible global economic slowdown. But experts say it’s a mistake to allow short-term currency fluctuations to determine your long-term asset allocation. It’s also important to look beyond where companies are based when evaluating investments, said Brett Gallagher, portfolio manager of the Julius Baer Global Equity Fund (BJGQX). This is an “old-world” way of doing things, he said.

“Investors are looking at the world in a way they did 20 years ago, saying, ‘Do I want to buy UK companies, Japanese companies, U.S. companies?’ And the reality is, those companies have changed so much, they’ve diversified so much themselves, what’s important is no longer the country of origin, or of incorporation, but rather the sectors and countries into which these companies have exposure.”