Investors punished for diversifying globally

Assets flood non-U.S. funds, but a broader allocation comes with trade-offs in a volatile world

By Trevor Hunnicutt

Jan 8, 2015 @ 12:16 pm EST

As mutual fund investors have warmed up to investing outside the United States, financial markets have punished them for doing so.

After 2013 paid those investors a handsome gain (“foreign large blend” funds as tracked by Morningstar Inc. climbed about 20%), many mutual funds focused on investments abroad lost value last year, rewarding U.S. investors — at least now — for maintaining what's sometimes called a “home bias” in their asset allocations.

That's an unfortunate fate for international stock funds, which are winning about $4 of every $10 moving into U.S. mutual funds, according to an analysis of Morningstar data by InvestmentNews, Crain's Wealth's sister publication.

Last year is likely to be the second in a row in which those international stock funds took in tens of billions more than their U.S. stock and bond counterparts, as well as other strategies and asset classes. The funds added $105 billion of the U.S. mutual fund industry's $303 billion last year, according to a Morningstar estimate that does not yet include the month of December.

But more assets do not translate into performance. In fact, it was a tough year for those funds. The success of global real estate funds, which rose 11.7% for the year, according to Morningstar, and in countries like India did little to alleviate the pain of global stock funds.

Value-oriented foreign funds fared particularly poorly, losing more than 6% in the year as Europe's lagging economy and a slowdown in China weighed on oil- and commodity-exporting emerging markets.


But as performance lagged, advisers were pumping billions into a set of fast-growing funds, both passively and actively managed.

For example, the Vanguard Total International Stock Index Fund (VGTSX) added $24.4 billion and the Dodge & Cox International Stock Fund (DODFX), which is so popular the manager is closing it to new investors on Jan. 16, took in $10.1 billion, according to the Morningstar estimate.

“The soft close is designed to proactively 'tap the brakes' on the fund's growth,” San Francisco-based Dodge & Cox said in a statement. “We believe this decision is in the best long-term interests of the fund's existing shareholders as it allows us to have stable and balanced growth within the fund.”

That's a lot of demand for a fund that returned 0.08% in 2014. But even that result substantially beat both its MSCI index and peers. The return outperformed its category average by more than five percentage points, according to Morningstar.

The difficulty of investing abroad can make the argument for global diversification harder for advisers to make successfully.

Even famous investors sometimes shrink from the challenge of investing abroad.

In an interview last month, index investing pioneer and Vanguard Group Inc. founder John C. Bogle said he "wouldn't invest outside the U.S.

Some investors remain bullish. Franklin Templeton Investments' Mark Mobius wrote a projection this week that emerging markets would drive growth globally.

But at Wells Fargo & Co., strategists are advising people to be cautious about developed and, especially, emerging markets.

“It really doesn't make a lot of sense to emphasize that area even though there could be a solid gain,” said Sameer Samana, a strategist at Wells Fargo Investment Institute, which serves thousands of the bank's financial advisers and brokers. “Once you take into account how much volatility is in those markets, you probably aren't getting paid to take that risk.”

But he said that while the firm's models have a baked-in home bias, the firm has warning people to not tweak their positions too much.

“You don't want to time your investments in and out of the markets,” he said.

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