(PUB) Investing 2015

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4 • Fund Family Shareholder Association
some reallocating. As always, use the
Model Portfolios as your guide.
Let’s start with some basics.
Foreign, international or global funds
invest in companies based outside of
the U.S., like Honda (Japan), Nestlé
(Switzerland), Bayer (Germany), Nokia
(Finland),Akbank (Turkey) or Samsung
(Korea). (Global funds, of course, also
invest in U.S. companies.)
Foreign countries and markets are
then usually divided into two buckets:
Developed and emerging. Developed
countries and markets tend to be mature
economies with high levels of gross
national income and have histori-
cally been considered less risky than
their emerging markets counterparts.
Examples of developed international
markets include Germany, the United
Kingdom, France, Japan and Australia.
Emerging markets, as their name
implies, are in the earlier stages of
economic development. That can mean
they have newer capitalist economic
systems and more fragile markets that
are susceptible to missteps and insta-
bility—factors that can add to volatil-
ity and risk for investors. Examples of
emerging economies include those in
China, many countries in southeast Asia
and eastern Europe, as well as countries
in Latin America. Recently, emerging
markets have been further subdivided
into two groups: The more established
emerging economies, such as China
and India, and a group of “frontier”
markets, such as Vietnam, Kenya and
Ukraine, that are in even earlier stages
of free-market and investment-market
development.
Why Bother?
From an investor’s perspective, it’s
an awfully big world out there. And
right now it looks awfully messy out-
side our boundaries. While the U.S.
economy is growing (albeit slower then
we’d like) and jobs seem plentiful,
overseas we’re seeing economies in
crisis (Greece), high rates of unem-
ployment (Spain), political unrest (the
Middle East and Africa) and uncertain
political leadership (Brazil). In fact, the
known unknowns are so myriad it looks
like staying at home is a great idea.
Plus, arguments for and against
investing in overseas funds run the
gamut and have recently received a lot
of attention in the media. The argument
for investing strictly in the U.S. is a
favorite of former Vanguard Chairman
Jack Bogle and his acolytes, who main-
tain that there’s little diversification
benefit in owning stock in non-U.S.
companies because U.S. companies
already derive a large share of revenues
and often an even larger share of earn-
ings from business conducted over-
seas. Coca-Cola, the quintessential U.S.
company, has a presence in virtually
every foreign market you can think of.
Coca-Cola may be based in Atlanta, but
it is a global franchise earning profits in
Egypt, Japan, Singapore and the U.K.
Why bother buying a European soda
maker when you can own Coke?
Further, those who argue against
investing overseas will warn that you
add a new and unique risk to your
portfolio when you invest in stocks that
are denominated in non-dollar curren-
cies—hence you shouldn’t do it.
The pro-global pundits believe
that most U.S. investors are woefully
underinvested in foreign stocks and
should have roughly half of their equity
portfolio invested outside of the U.S.
Vanguard currently says 40%, but that’s
just the latest iteration of the company’s
advice, which has steadily increased
recommended allocations from 10%
to 20% to 30% and now 40% of your
stock holdings since the latest change
just a few months ago.
In fact, Vanguard could well be mov-
ing towards the efficient market thesis
that you should match the markets,
globally, with your own portfolio. So
40% may not be the last stop in this
journey. Because isn’t the efficient mar-
ket theory what indexing is all about?
Using Total World Stock Index as
a proxy, for instance, the U.S. makes
up just 48% of the value of the world’s
stock markets. That would suggest that
only 48% of your stock portfolio should
be in U.S. stocks, and the other 52%
should be in foreign stocks. And that’s
exactly what you’ll get if you invest in
the fund. For those who are indexing
purists, this is gospel, but as with so
much in the world of academics, the
human factor makes a mess of dogma.
Consider that while Total World Stock
Index is now seven years old and opened
at a time when investors had begun to
suffer massive losses and could have
easily switched funds with little or no
tax consequence, it’s collected only a
bit more than $7 billion in assets—hard-
ly a ringing endorsement by indexing
believers. Total International Stock
Index, which doesn’t invest in the U.S.
at all, is 23 times bigger.
Unfortunately, I’ve noticed that the
arguments for and against investing in
foreign funds tend to follow perfor-
mance. Foreign stocks are attractive
when they are doing well, and much less
so when they aren’t. Hence, you haven’t
seen a whole lot of table-pounding for
foreign shares until very recently.
Take a look at the chart below, which
shows the relative performance of Total
Stock Market and Total International
Stock since the foreign index fund’s
inception, and you’ll see why most
investors have remained shy of the for-
eign markets. When the line is rising,
U.S. stocks are outperforming foreign
stocks (all based on U.S. dollar returns,
of course). When the line is falling,
foreign stocks are tops. As the chart
shows, there was a long stretch from
the mid-’90s to early 2002 when U.S.
stocks led, followed by a long period
of foreign stock outperformance until
the middle of 2008. At the end of 2014,
though, domestic stock dominance
gave way to foreign stocks.
OFFSHORE FROM PAGE 1 >
Domestic vs. Foreign
Stock Leadership
6/97 6/99 6/01 6/03 6/05 6/07 6/09 6/11 6/13 6/15
Total Stock vs. Total Int’l Stock Index
Rising line = U.S. markets outperforming foreign markets
0.80
1.00
1.20
1.40
1.60
1.80
2.00