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Part II: Establishing a Great Fund Portfolio
In addition to the risks normally inherent in stock-fund investing, international securities and funds are also influenced by changes in the value of foreign currencies relative to the U.S. dollar. If the dollar declines in value, that helps the value of foreign stock funds. Some foreign stock funds hedge against currency changes. Although hedging helps to reduce volatility a bit, it costs money to do, so I wouldn’t worry about it if I were you. Remember, you’re investing in stock funds for the long haul. And in the long haul, your international stock funds’ performance will largely be driven by the returns generated on foreign stock exchanges, not currency price changes.
The following sections offer my picks for diversified international funds that may meet your needs. Compared to U.S. funds, there are fewer established international funds, and they tend to have higher annual expense ratios. So I’ve listed fewer options for you (don’t forget the two foreign stock index funds, Vanguard Total International fund and Schwab International Index fund, which I discuss in the index section in this chapter). Beware of unproven managers and fund companies that are advertising the heck out of newly developed international funds. Newer funds in this area also tend to have high expenses, which will depress your returns.
T. Route Price International Stock
The international stock fund of T. Rowe Price, a pioneer in international investing, has performed well since its inception in 1980. It invests primarily in larger companies in larger, established economies, but it also invests modest amounts (10 to 20 percent) in emerging international stock markets.
This fund is team-managed by the firm of Rowe Price-Fleming (a joint venture with Fleming, a London-headquartered private money management firm). The team is led by Martin Wade, who has three decades of experience in international stock investing. The fund uses numerous managers around the globe, each of whom is responsible for researching stocks in specific countries. The annual operating fee is an internationally reasonable 0.9 percent. Initial minimum investment is $2,500 ($1,000 for retirement accounts). ® 800-638-5660.
Vanguard International Grou/th
Like T. Rowe Price International Stock, Vanguard International Growth invests primarily in large companies with growth potential, mainly in established countries. It also invests about 10 to 20 percent in emerging markets.
International Growth is managed by London-headquartered Schroder Capital Management, which has research offices around the world focused on specific countries. The team is led by Richard Foulkes, who has managed this fund since its inception in 1981. This fund has a Vanguard-thin expense ratio of 0.6 percent and has been reasonably tax-friendly. Initial minimum investment is $3,000 ($1,000 for retirement accounts). ® 800-662-7447.
Chapter 9: Funds for Longer-Term Needs: Stock Funds
Warburg Pincus International Equity
This fund invests in an eclectic mix of small-, medium-, and large-company value stocks in both established economies and emerging markets (which often make up a third or so of the fund).
This fund is managed by Richard King, who has three decades of international investment experience and has managed this fund since it began in 1989. At 1.3 percent, annual operating expenses are slightly higher than those for some of the fund’s peers, but expenses have continued to fall as the fund’s assets have grown. This tax-friendly fund is available through most discount brokers without transaction fees. Initial minimum investment is $2,500 ($500 for retirement accounts). ® 800-257-5614.
USAA International is well-diversified internationally and focuses on larger company stocks. This fund has been managed since its inception in 1988 by David Peebles. Expenses for this tax-friendly fund are a tad high at 1.1 percent, but they’re coming down as assets grow. Initial minimum investment is $3,000 ($250 for retirement accounts). ® 800-382-8722.
Tweedy Browne Global Value invests mainly in smaller- and medium-size value stocks worldwide, primarily in established countries. Although it can invest in the United States, its U.S. holdings are expected to be small (less than 20 percent of the fund). The parent company has an excellent reputation, managing money privately since the 1920s; this fund itself has been in existence only since 1993 but has done well. Operating expenses, consistently lowering as the fund grows in size, are still a bit on the high side at
1.4 percent. Initial minimum investment is $2,500 ($500 for retirement accounts). ® 800-432-4789.
One of a kind: Recommended specialty funds
Specialty funds don’t fit neatly into the other categories I discuss in this chapter. These funds are often known as sector funds because they tend to invest in securities in specific industries.
Specialty or sector funds should be avoided in most cases. Investing in stocks of a single industry defeats a major purpose of investing in mutual funds — you give up the benefits of diversification. Also, just because the fund may from time to time be dedicated to a “hot” sector (a sector fund or two is often at the top of short-term performance charts), you can’t assume that the fund will pick the right stocks and/or bonds within that sector.