A study provided by Vanguard in 2012 stated that 30%-40% of an investor’s stock portion of their portfolio should consist of international stocks. Investors typically have a significant bias towards owning investments within their own country—this is known as home country bias—so by diversifying internationally, investors can gain exposure they would otherwise be neglecting. Furthermore, investing internationally adds both rewards and risks, including currency risks, but it can add much needed diversification to a portfolio, especially if their home country suffers a serious economic recession.
While there are many ways to invest internationally, international mutual funds are a great way to gain exposure to international markets while simultaneously being diversified. It is also proven that investing in a mix of U.S. and foreign stocks has produced better returns, with less risk, than investing in the U.S. market alone. It is no wonder then that there are so many different types of international mutual funds.
How International Equity Funds Can Be Used in a Portfolio
There are many different kinds of international mutual funds that an investor may choose to invest in to gain exposure to outside markets. An investor may choose to invest in one specific country; they may choose to invest in a mutual fund that specializes in multiple countries; they may purchase a mutual fund that specializes in sectors of the economy rather than purely demographic regions; or they may invest in multiple international mutual funds. The caveat is that each investment has very different risk and return profiles.
As the name suggests, these funds invest throughout the world, including the investor’s home country.
These mutual funds are any funds outside an investor’s home country. For example, from an American’s perspective, it would be any funds not based in the U.S.
Regional funds are designed to focus on a specific geographic region. Rather than buy a mutual fund that invests all over the world, an investor could buy multiple regional funds.
These mutual funds focus on a single country, with the benefit being that the mutual fund would be specialized in that single country.
Global Sector Funds
Rather than focus on geography, global sector funds focus on a particular sector of the economy in international countries. This is great for gaining exposure to sectors rather than strictly countries.
Benefits of Owning International Markets Through Mutual Funds
Diversification helps reduce the risk with any single investment. While there will always remain systematic or market risk with any investment, unsystematic, or specific risk, will decrease. It smooths out returns during periods of unpredictability.
Professional Management Portfolio managers manage mutual funds. They rebalance the portfolio to match the investment objectives of the fund and decide what stocks to buy and sell for a modest fee. This is beneficial to those investors with little time or expertise to maintain their own portfolio.
The mutual fund manages everything and thus the investor can sit back and enjoy a maintenance-free investment as long as they are invested.
International mutual funds can be bought or sold without worrying about a spread or how liquid the market is. They only take one day to settle when their net asset value is calculated at the end of the day.
Despite their advantages, international mutual funds have unique risks associated with the investment and may not be suitable for conservative investors. Because investing internationally involves other currencies, there is a certain currency risk involved and fluctuations with currency can add to or eat away potential returns.
Furthermore, there can be political risk, especially with emerging markets. The political stability of a country’s government can have a great impact on the value of the investment. Governments can change certain laws or there could be social unrest, which affects investments in those countries. Higher inflation can also decrease potential returns. Lastly, being overweight in one country, even outside of an investor’s domestic market, can be just as vulnerable as concentrating investments at home.
That being said, investors willing to take on the risk can certainly add to their returns. International mutual funds are split into so many different types, so being diversified in this way can limit the risk associated with any one investment.
Popular International Mutual Funds
Below we feature some of the best rated and best performing international mutual funds using ratings from Morningstar, Lipper, Zack’s, TheStreet.com, and Standard & Poor’s. It is important to note that previous performance is not a guarantee of future performance, but this list gives an idea of what international mutual funds cover and what to look for:
China Region: Oberweis China Opportunities Fund (OBCHX)
Diversified Emerging Markets: Harding Loevner Frontier Emerging Markets Fund (HLFMX)
Diversified Pacific/Asia: Fidelity Pacific Basin Fund (FPBFX)
Europe: T. Rowe Price European Stock Fund (PRESX)
Foreign Large Blend: Artisan International Value Fund (ARTKX)
Global Real Estate: Third Avenue Real Estate Value Fund (TAREX)
India Equity: Matthews India Fund (MINDX)
Japan Stock: DFA Japanese Small Company Portfolio (DFJSX)
Latin America Stock: Deutsche Latin America Equity Fund (SLANX)
Pacific/Asia Ex-Japan Stk: Matthews Pacific Tiger Fund (MAPTX)
The Bottom Line
While any kind of investment involves risk, including international mutual funds, investing in international funds presents unique risks including political, currency, regulatory and economic. The key is for the investor to do their homework, and understand where the investment’s exposure will be. Understanding any political risks can also be important before making any investment decision.
To be vigilant, investors should set a target, monitor the allocation, and continually rebalance while keeping an eye on any developments within the portfolio. International mutual funds may not fit with a conservative person’s investment portfolio, but looking outside their domestic market may reward those investors seeking additional returns especially as global trade continues to expand and the world’s economies grow. Despite short-term volatility, historically, international equity markets have had favorable prospects for continued growth. International mutual funds can capitalize on that potential.
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