| WEALTH MANAGEMENT - March 2006
by Andy Olsen
Time to Invest Overseas?
Weighing the ups and downs of moving assets into foreign markets
 It was the big mutual fund story of 2005: For the fourth year in a row, American investors made the biggest gains by pumping their cash overseas. The average foreign stock fund returned 17.8 percent for the year, according to Morningstar Inc. – making the average 6.8 percent return for a U.S. fund seem almost meager.
In the last decade, nationalistic U.S. investing attitudes have been eroding with major shifts in the world economy. For many Americans, a larger percentage of assets held overseas has made the difference between acceptable and incredible investment returns in the past 10 years.
Such performance has led some strategists to suggest that investors put as much as 50 percent of their equity allocations into foreign holdings. Others are less confident and suggest a bit more caution when moving money abroad.
So how much foreign wealth is right for your stock portfolio? That depends on how much you’ve got to invest and on how you see the global economy shaping up in the coming years. Here are some of the pros and cons you might consider about the behavior of foreign funds:
The Good: Sheer performance
Just how well did foreign funds perform in 2005? The average Latin American stock fund boasted a staggering return of 55 percent. That was by far the leader of the pack, but others also performed with jaw-dropping results. The average diversified emerging-markets equity fund soared 32 percent, and Japanese funds climbed more than 18 percent.
The Bad: High costs coming
There’s no guarantee emerging-markets stocks will yield such impressive returns in 2006 and beyond. With such good recent performance, the highly volatile shares are not as cheap as they once were.
The Good: Commodity-driven growth
China’s red-hot economy and others have triggered a boom in commodity prices that has boosted profits across the board in many emerging markets. That is likely to continue, fueling economic growth in those markets for years to come.
The Bad: Commodity-driven growth
Good economists frown on overdependence on commodities because it can breed economic instability. If low risk is your greatest goal, the U.S. market is still the best bet. Its resilience to high energy prices, a disastrous hurricane and continued interest rate increases surprised many investors.
The Good: Weaker dollar
The U.S. dollar has slid considerably since 2002 against the euro and other currencies. And as foreign currencies appreciate, U.S. investors’ holdings of foreign assets are worth more in dollar terms. For example, Mexico’s stock market climbed 37.8 percent in pesos last year. Because the peso appreciated against the dollar, the total gain for U.S. investors there was 44.5 percent.
 The Bad: Dollar is no wimp
Don’t count on a weak dollar alone to double your investments overseas. The almighty dollar did not depreciate in 2005 as much as many feared. It actually recovered some losses against the euro and the yen last year, which hurt U.S. investors’ returns in European and Japanese stocks (though those markets still outperformed the U.S. market).
The Good: Everybody’s doing it
Sending roughly $149 billion beyond U.S. borders, American investors pushed more money into foreign stock funds in 2005 than in the previous four years put together. That counts as quite a boost in investor confidence. Many analysts feel the U.S. market is overvalued compared to markets overseas, according to a recent Merrill Lynch survey.
The Bad: Too much Yankee money
So many U.S. investors and their greenbacks could inflate some overseas stocks and risk a painful correction in the future, particularly in heated economies like Japan. A report last month from Morgan Stanley recommended that global investors reduce their holdings in foreign markets and increase those in U.S. stocks, which might benefit from an anticipated stabilization or even late-year cutting of Federal Reserve rates.
Sources: Morningstar Inc., Morgan Stanley, analyst reports, The New York Times
Andy Olsen is managing editor of The Lane Report
editorial@lanereport.com
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