Understand the differences between foreign and domestic mutual funds is critical as part of an asset allocation plan. Here’s what you need to know.
I remember a time when “Made in China” stamped on a product was a novelty. Not anymore. Today, the growth of industry outside the U.S. is proceeding at a fast clip. Globalization, as many describe it, is making investments abroad more critical to a diversified portfolio than ever before. In fact, about 50% of the global market capitalization is outside the U.S. Excluding Emerging Markets, which will talk about in the next article in this series, mutual funds that invest globally can be divided into four categories:
- World Funds: Sometimes called global funds, these mutual funds invest in companies throughout the world. One important thing to note with a World fund is that they also invest in U.S. companies, so it’s important to find out exactly where the funds invest. Two such funds are the Vanguard Global Equity fund (VHGEX) and Janus Worldwide (JAWWX). According to Morningstar, VHGEX holds 38.7% of its assets in U.S. companies, while JAWWX has 54.1%. As a result, you may not get the international diversification you want from a world or global fund.
- International Funds: If you want little or no U.S. exposure in your foreign funds but significant diversification across most regions throughout the world, international mutual funds are the place to start. These funds generally invest in most regions throughout the world, but you still need to determine exactly where the fund invests and if its investments focus on any particular regions. Two examples of an international fund are Dodge & Cox International (DODFX–a fund I own) and Quant Foreign Value Institutional (QFVIX). You can quickly determine where an international fund invests by typing its ticker into the Quotes box on the main page of Morningstar. When the fund’s Snapshot appears, click the Portfolio tab on the left sidebar, and than scroll to the bottom of the Portfolio page. Here is what it looks like for DODFX:
- Region Funds: There are many funds that invest in certain regions of the world, such as Europe, Latin America or Asia. Region specific funds allow you to greater flexibility in determining your international allocation, but also require substantially more work because you’ll need to buy more funds if you intend to diversify your investments across all international regions.
- Country Specific Funds: As the name suggests, country specific funds are mutual funds that invest in a single country. As with region funds, the amount of work required to diversify your international investments in substantial. Some combine country specific funds with international funds if they believe certain countries will see substantial growth in the coming years.
One final tip. If you want to search for mutual funds in any of these categories, Morningstar offers a free mutual fund screener. In the Fund Group box (which is the first one on the page), select International Stock. In the next box, Morningstar Category, you select the specific type of international fund you’re interested in. The fund screener than allows you to set other search criteria as you wish. In the next article in this series, we’ll look at one type of international fund that we didn’t cover here, Emerging Markets.Topics: Asset Allocation