Diversification is the best way to control risk in your portfolio of mutual funds. But there are several ways of achieving broad geographical diversification. A global fund may be the most obvious. But international funds may provide a better way for some investors.
Foreign equity funds that are broadly diversified by geography generally fall into two categories: some are called global equity funds and others are called international equity funds. The difference may seem one of semantics. But each of the two categories of funds does things differently. And depending on your portfolio, one or the other may be best for you.
Global funds invest anywhere in the world. But international funds invest outside the U.S. Most international funds, in fact, restrict their investing to outside North America.
Why would any one want a fund that invests internationally excluding the U.S.?
U.S. stock markets account for more than half the market value of all public companies in the developed world. What’s more, the U.S. has possibly the most transparent accounting standards and the most readily-available business information of any country.
Consequently, the U.S., perhaps along with Canada, constitutes a unique class of stock-market assets. And the country has evolved some highly-specialized investors. One of these is James O’Shaughnessy, whose quantitative funds, such as RBC O’Shaughnessy U.S. Value, have delivered some relatively top-rate results over the years.
U.S. plus one more
If you hold investments in such a U.S. fund, you might consider that all the U.S. exposure you need. Or maybe you would rather control how much asset exposure you have to the U.S. by investing directly in U.S. equity funds. Then, you could add a collection of other, region-specific funds. Or perhaps a diversified equity fund that concentrates on the rest of the world might provide a better solution to complete your global diversification.
That’s where international equity funds fit in. They usually use the Morgan Stanley Europe, Australasia and Far East (EAFE) Index as their benchmark.
The Canadian Mutual Fund Adviser includes two international equity offerings among its Top-40 funds:
The first, MAWER INTERNATIONAL EQUITY FUND (MAW102(NL)), invests mostly in Europe. But it also gives you exposure to Far Eastern countries such as Japan, Singapore and Hong Kong. The fund’s largest country weighting is the U.K., which makes up 34 per cent of the portfolio. Germany comes second at 11 per cent.
The second, TEMPLETON INTERNATIONAL STOCK FUND (TML705(BE), TML7359(FE), TML742(LL)), also invests most of its assets in Europe. But the fund also has sizable positions in China and Japan. Its top country weightings are the U.K., 11.9 per cent; China, 11.4 per cent; and Japan, 10.1 per cent.
Both Mawer International Equity Fund and Templeton International Stock Fund make excellent complements to U.S.-only stock funds. Both hold high-quality companies which, among other things, are well established, have survived when the economy is weak, and have thrived when prosperity returns. You’ll find such blue-chip names as Rolls-Royce, or the multinational drug companies Bayer and Merck in their portfolios.
Canadian Mutual Fund Adviser, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846