| How to Invest Abroad with Funds continued... |
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| What's its style? |
| A few years ago, style wasn't an issue for foreign-stock funds. Most took a growth-at-a-reasonable-price approach and focused on large-company stocks. After all, international-investing pioneers like Sir John Templeton and the managers at Scudder had profited for decades on such strategies. Why mess with a good thing? |
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| In the 1990s, though, well-known pure-growth investors at Janus and American Century successfully exported their strategies. In fact, Janus Overseas and American Century International Growth TWIEX are two of the highest-rated funds in the foreign-stock category. Growth-oriented foreign-stock funds have trounced their value counterparts during the past five years. |
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| The complexity doesn't end with value versus growth. Today's international-fund investors can also choose small-cap offerings in addition to large-cap funds. More than two dozen funds specialize in small, foreign companies. |
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| Whether you choose value or growth, large-cap or small-cap should depend on how much risk you can handle. If you chafe at ups and downs, snub all small funds: They tend to be more volatile than large-cap-heavy funds. And the easiest way to get exposure to both large-value and large-growth stocks is through a middle-of-the-road large-cap fund, such as Vanguard Total International Stock Index VGTSX. |
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| What's its currency-hedging policy? Whether managers remain fully exposed to foreign currencies or swap those currencies for U.S. dollars (called currency hedging) can affect short-term performance. The managers of Putnam International Growth POVSX, for example, say that they added an extra two percentage points of return by moving out of falling currencies and into the rising U.S. dollar in 1997. |
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| But there's a fine line between currency hedging and market timing. After all, if managers sell their yen because they think the currency is going to slip, that's an awful lot like ditching stocks and raising cash because they think the market is about to slip. |
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| To squash the unexpected behavior that can accompany mistimed currency plays, favor funds that never hedge, such as Artisan International ARTIX or Templeton Foreign TEMFX, or those that always do, such as Longleaf Partners International LLINX. |
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| What does it cost? |
| We think costs are important to consider when evaluating all types of funds. Costs are especially high when investing abroad. The average foreign-stock fund charges 1.89% in annual expenses versus 1.34% for the average diversified U.S.-equity fund. Foreign funds often cost more because of the extra research that goes into international investing, including covering a greater number of companies and digging through less-than-transparent financial statements. |
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| Don't let the averages depress you. There are a number of modest-expense international funds out there. |
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