Too Late for International Funds?

[Craig]

Along the same lines as another "too late" thread, we're DCA'ing into more mutual fund investments this year (focusing on Vanguard), and wondering if it would be best to put a significant amount towards one of their international index funds.

Reading Buffett's comments on the dollar ("sharecropper society", etc.), and noting the overall trend.

But also wondering if this train has already left the station, and would we simply be DCA'ing into nearly a guaranteed loss in the short run? *We always prefer to buy what is cheap and out of favor, but ... the only thing that appears "cheap" these days is ... cash.

Anyone else out there thinking through the same math, and what are you concluding?

Thanks.

[laurence]

I think you are right on, my international funds have had a nice run up over the last 24 months, but I can't see much more upside. It's all about your time horizon, though. I still put 10% of my DCA/retirement investments in international for balance.....if only there was a good way to invest in China, they still have huge potential in my book, any ideas?

[JohnP]

To me, International funds are our opportunity to somewhat shield us from the inevitable fall in the dollar value compared to the rest of the world's currencies. This is what Buffett means when he talks about betting against the dollar, and why Bill Gates has asked to exchange $s for the Chinese yuan. Our twin (or triple or quad depending on who is counting) deficits in US Govt and Balance of Trade are only balanced by a $2B/Day loan by foreign countries, primarily, China, Japan, and Korea. There was a recent panic in the market that was blamed on South Korea publicly considering their loan policy with the US.

IMHO, there is no 'light at the end of the tunnel' for any of these deficits, thus, it is definitely not 'too late' for International Funds.

JohnP

[Hyperborea]

As I've posted here before I use a roughly market equity weighting to balance my US equity against my international. Using that measure would put one's allocation to roughly 40% US and 60% non-US. It may make sense for a US based investor to overweight US holdings but by how much particularly if all or most of their fixed income is US dollar based?

As for China there are two ETFs that I know of. The first is, FXI, an iShares ETF using the FTSE/Xinhua 25 Index. The second is a slightly newer one that uses only Chinese securities on US exchanges (either ADRs or Chinese companies that list in the US) - PowerShares Golden Dragon - PGJ.

[charlie]

Charles,

IMHO, you need international equity exposure for
the long haul regardless of the current "price".
The DCA approach, if spread over at least 3 years,
will help insulate you from getting fully invested
at a market peak .... in fact you should be praying
for a market crash if you are in the early accumulation
phase. That would give you a chance to buy low.
Of course, I am praying the other way!

In either Bernstein's "4 Pillars ...." or one of Swedroe's
books the point is made that citizens of every country
are biased toward owning local stocks and consider investing in other countries as risky. In fact, the long term returns of US stocks and foreign stocks are very comparable.

Cheers,

Charlie

[azanon]

Over the past decade, international funds are still one of the worst performers, Charles, so no I'd definitely say its not too late. I'm hoping for the 80s like returns again for international funds.

Now, I'm mainly talking about developed countries. I'd probably avoid Emerging markets now simply because those have skyrocketed the past year. I plan to eventually add some emerging market but i'm goint to wait for one more valley if i can be so lucky.

[wildcat]

I am with ronin and azanon. International funds may creep up to the US markets in terms of performance but from what I can tell they never pass it over a long period of time. Maybe a short-term bet (b/c they seem to appreciate faster or catch up when the dollar drops) but over the long-term US. International markets are more positively correlated to the US than they used to be.

[Hyperborea]

Quote:

I am with ronin and azanon. *International funds may creep up to the US markets in terms of performance but from what I can tell they never pass it over a long period of time. *Maybe a short-term bet (b/c they seem to appreciate faster or catch up when the dollar drops) but over the long-term US.

I'm not sure what make you believe this. *If we look at the data for 16 mostly developed markets (Western Europe, Canada, Japan, Australia, South Africa, US) over the time period 1900 to 2000 then most of those markets were close to the returns of the US market and Australia and South Africa had higher returns - much higher in the case of Australia. *So, "never" is not true.

This was also a time period that had a number of events that we are unlikely to see happen again - the US moved from just barely developed country or late stage emerging market to the largest market and many of the European countries had their economies destroyed twice in world wars. *The US is now no longer the largest market but instead the EU is. *The US can't go from being an emerging market to a developed market again.

Quote:

International markets are more positively correlated to the US than they used to be.

Yes the correlation is high now but it does appear to vary over time. *The book Triumph of the Optimists shows some interesting results on this variation. *I would reccomend finding the book.

Even with the current higher correlation a US based investor would have had over a 20% reduction in the volatility of their portfolio with an 80% world market (which includes the US in relation to their market capitalization) and a 20% US division of equities. *For most countries the optimum home/away split appears to lie somewhere between 50% and 80% in world market weighted equites.

[cute fuzzy bunny]

I wouldnt touch china with an 11' pole. As a manufacturer, their specialty is low margin cheap labor undercutting. As a consumer, the vast majority of the country lives and will continue to live at a level that makes the worst US poverty scene look like a caribbean vacation.

Europe is fairly valued. Japan is still cheap and if they ever solve their economic problems, there is huge upside. Thats a big 'if'. Emerging markets are overpriced.

I have equal amounts of vanguards europe, pacific and emerging markets funds. about 5% of my port each. Have owned them for some time. All three are up since I bought them. I wouldnt buy a lot more of any of them right now.

[brewer12345]

About a year ago, I decided I wanted more international exposure. Through sales of other stuff and new investment via 401k contributions, I am now up to almost 20% international equity exposure. Last week, I shut off the flow of incremental funds going to intl equity, as I have enough and prices have risen substantially. For now, incremental funds are going into a stable value fund, as I am too light on fixed income.

[charlie]

After reading "The Coming Generational Storm"
I decided to increase my international allocation.

As of this morning, my IRA now includes FXI
iShares FTSE/Xindua China 25 and EPP iShares
MSCI Pacific xJapan at 3% each of my IRA total
plus GIM Templeton Global Income at 6%. This
brings my total international allocation to 25%
in my IRA.

Thanks to Hyper for suggesting FXI and GIM.

At the same time I reduced my total coffeehouse
allocation from 60/40 stock/bond to 50/50 each.

FXI is a cap weighted index fund of Chinese stocks
that just started in late 2004. It has an ER of 0.74.

EPP focuses on the Pacific area minus Japan. It
pays a yield of 3.16% and has an ER of 0.50.

GIM has a yield of 4.8% with an ER of .77%. It is
a little pricey with a premium of 3.4%, but I mostly
wanted it as a hedge against the falling dollar.

Now watch international crater and the dollar soar.


Cheers,

Charlie

P.S. Vanguard is now offering VIPERS for Europe,
Japan and Emerging Market

[wildcat]

Hyper -

You are telling me I would have more money today if I would have invested in one of the other 16 most developed countries as opposed to the US? If so wow I never would have guessed. Wouldn't you agree the positive correlation will remain high b/c how global business is today? Seems like we are only going forward in that area or in other words we continue to eliminate business barriers between foreign countries (especially developed foreign countries) which to me = + correlated markets. I am just going by what I think and I do not have a book to back my observation. You are totally correct with respect to lowering the volatility of a portfolio but I just have a hard time putting money into international funds. Most of them charge high expense ratios and the Vanguard International Index funds do not seem that attractive either. Seems like if people are afraid of the weak dollar it would make more sense to bet on other currencies b/c foreign stocks, as some of you have suggested, do not look all that attractive.

FYI - I am not trying to sound smug at all and I just like to hear opinions and facts.

[ESRBob]

Quote:

but I just have a hard time putting money into international funds. Most of them charge high expense ratios and the Vanguard International Index funds do not seem that attractive either. .

Charlie had it in his footnote, but it is important: Vanguard has just released 3 new ETFs: Europe, Asia and Developing Countries, I believe, which have expenses around .18%. That is below the equivalent index funds, which in the case of the Developing Markets Index is around .5% (the others are more around .3%)

So that gives you a nice drop in fees which I believe has never been available in international equities any other way.

As for timing, I think you can drive yourself silly trying to figure out when is a good time or a bad time to fix your allocation and get into a new asset class. DCA if you are worried, but you belie market timing roots if you honestly think you know if some asset class is over or under-valued at any given point in time.

I sleep really well now that I own 14 asset classes and have convinced myself I am nowhere near bright enough to know if one or another of them is going to go up or down over the next year. And I don't care -- I'm going to own them anyway, whether they go up or down, and if they go down, I'm going to own even more of them when I rebalance.

It is a very different mindset and I have to say, it is a huge relief from my former anxiety.

Even if I were extremely clever and could get in and out of an asset class, it wouldn't make that much difference to the portfolio as most of them are all pretty much less than 10% of my portfolio.

It's the Slicer's Dividend: peace of mind.

Philosophically, if I "own the whole world" I am somehow connected to everything and everyone without having lots of preferences, likes and dislikes, aversions and so forth which has a strong philosphical pedigree for any other eastern religion scholars out there.

[charlie]

Great points, ESRBob ..... especially the "peace of
mind" part.

Cheers,

Charlie