THE WALL STREET JOURNAL: Investors Gaze Abroad For Stock Gains (ShellNews.net)

By CRAIG KARMIN

Staff Reporter of THE WALL STREET JOURNAL

August 22, 2004

Investors finally appear to be listening to what Wall Street has been preaching for years: It's important to diversify a portfolio with foreign stocks.

U.S. net purchases of overseas companies' shares shot to a record $72 billion last year, easily topping the high mark of $63 billion from 1993. Through midyear in 2004, the appetite for foreign stocks appears to be growing again: U.S. investors bought $43 billion more in foreign stock than they sold -- an annualized rate of $86 billion for 2004. That would be a 20% rise from last year's record purchases.

 Investment pros say several things have sent them shopping abroad. The dollar, though up slightly this year, has been in an extended bear market for much of the past two years. So returns in overseas stocks look better when translated back into the U.S. currency. The Dow Jones Euro Stoxx 50, for instance, gained 16% last year in euros but 39% in dollars.

Nearly half of this year's U.S. foreign investments were made in Japanese stocks, reflecting a popular belief that Japan's economy is on the rebound. Global portfolio managers also argue it is a disadvantage to limit a portfolio to the U.S when many of the world's best companies and fast-growing economies are found abroad.

The slipping U.S. stock market also is driving the trend.

"People may be noticing that our stocks aren't doing so well, so it's time to look elsewhere," says Steve Bleiberg, global strategist for Citigroup Asset Management.

While the Dow Jones Industrial Average is down 3.3% this year, Tokyo's Nikkei Stock Average is up 2%. The Dow Jones Stoxx Index of 600 European companies is down a modest 0.1%, and emerging markets are down 2.4% after soaring 52% in U.S. dollar terms last year.

Mutual-fund numbers suggest that it's not just pension funds and large institutions venturing overseas. Flows into foreign-stock mutual funds aimed at individuals are rising, too. The acceleration of money into these funds has been greater than that of new money into U.S. stock funds, according to AMG Data Services. Overseas equity funds saw inflows of $32.7 billion through Aug. 18. That is closing in fast on 1994's full-year record of $34 billion. Japanese stock funds, meanwhile, have seen inflows of $4.5 billion, already surpassing record totals in 1999.

Some of the top-performing funds that invest primarily in stocks abroad include the AIM International Emerging Growth fund, the American Century International Opportunity fund, and the Oppenheimer International Small Company fund, all of which have returned between 20% and 23% annually over the past three years.

Just a Fraction

Even so, overseas investments represent a small fraction of the money Americans spend on domestic shares. U.S. investors historically have shown a strong home bias, looking abroad only when foreign prospects appeared particularly bright relative to the U.S. "Interest in foreign stocks tends to speed or slow down based on people's perception of future performance," says George Murnaghan, head of U.S. institutional sales and client services for T. Rowe Price, the mutual-fund giant.

Moreover, foreign stocks often come with additional risks and costs. If the dollar has a big rally, then returns in overseas stocks would be lower when converted back into dollars. Corporate-governance standards vary around the world, and many places don't have the same level of disclosure that is required of U.S. companies. Fees also are higher: The annual expense ratio for the average foreign-stock fund is 1.74% of assets, compared with 1.5% for the average diversified U.S. stock fund, according to Morningstar.

And in an increasingly globalized economy, the performance of the U.S. stock market and most major foreign markets have become more closely correlated, so that in recent years the diversification benefits of buying foreign shares have been muted.

"Global markets are moving in sync now more than in the past," says Gregg Wolper, a senior fund analyst at Morningstar. He adds, though, that foreign markets are "not moving in lockstep" with the U.S. Sectors such as retailing and banking still react more to local conditions than to global trends.

Some argue that momentum from the U.S.-led global recovery is shifting overseas. Two years ago, the U.S. was trying everything to stimulate its economy and markets. The Federal Reserve was slashing interest rates, the government was cutting taxes, consumers were refinancing their mortgages and companies were retooling their balance sheets. The cumulative effect helped drive last year's global stock-market rally.

"Now people look out on the horizon and wonder what's going to be the pleasant surprise for the U.S. stock market," says Christopher Smart, director of international investment at Pioneer Investments in Boston. "There may be more opportunities ahead in Europe and Japan."

Shifting Interest

Interest in foreign stocks has shifted from one corner of the globe to another as some economies heat up and others cool down. Excitement over China's locomotive economy in 2003, for instance, helped stoke interest in Asian stocks beyond Japan. These purchases soared to a record $26.5 billion, or 37% of all foreign purchases. U.S. net purchases of Brazilian stocks came to $1.9 billion.

This year, concern about China's effort to slow its economy has dulled some of the enthusiasm for Asian companies and Latin American markets that export commodities to China. But fresh attention to European shares, which account for 39% of foreign purchases, and Japanese equities (46%) has more than compensated, so that total foreign purchases continue to climb.

"U.S.-investor preference for foreign stocks has never been stronger than in the past year and a half," says Joseph Quinlan, chief market strategist for Banc of America Capital Management.

Dominic Freud, an international portfolio manager with Oppenheimer Funds in New York, argues that with many industries now much more globalized, it doesn't make sense to ignore U.S. competitors based abroad. "It's fundamentally illogical not to invest internationally," he says.

In the auto industry, he notes, General Motors and Ford Motor compete with Toyota as much as each other, and in the oil industry Exxon Mobil and BP and Royal Dutch Shell are very similar companies that offer similar products, even though the latter two are based in Europe.

Write to Craig Karmin at craig.karmin@wsj.com