Using a wide-ranging investing style, Peter Lynch dominated the fund world during the 1980s. The manager of Fidelity Magellan was known to pick stocks from all over the market: He would buy small bank stocks one year and large industrials the next. In the 1990s, Lynch retired, and suddenly his investing style fell out of favor. Most fund managers were corralled into narrow boxes. Urged by consultants, more fund companies began requiring managers to follow tightly-defined investing disciplines, such as small value or large growth. By maintaining purity, the consultants said, funds could produce more predictable results and enable advisors to control their asset allocations.
Now companies are again modifying the rules on style purity, particularly in the domestic and international categories. Domestic funds are beginning to hold large stakes of foreign stocks; foreign funds are buying in the U.S. Several companies — including Oakmark and Royce — recently introduced global funds, which can invest in the U.S. and abroad. “The line between foreign and domestic is blurring,” says Gregg Wolper, senior fund analyst for Morningstar.
The shift at many funds is dramatic. In 2000, top-performing Dodge & Cox Stock had 3 percent of assets outside of North America. Today the fund has 19 percent of its holdings abroad. Noteworthy domestic funds with more than 20 percent of their assets overseas include Royce Low-Priced Stock, Calamos Growth and CGM Capital Development. Apparently disregarding its name, Growth Fund of America — the largest fund with more than $165 billion in assets — now has 17 percent of its holdings abroad.
Fund managers say that they have moved overseas to find faster earnings growth, and many foreign bets have proved to be winners. Should advisors fret about the style drift? Not necessarily, says John Sterba, president of Investment Management Advisors, a registered investment advisor in New York. “If you have a great manager, you should give him some freedom to pick stocks.”
Morningstar's Gregg Wolper also suggests that advisors not worry when their portfolios become a bit overweighted in foreign stocks. In the past, Wolper says, the distinction between foreign and domestic companies was clear. But that has changed as businesses have become more global. ExxonMobil, the largest member of the S&P 500 index, derives 30 percent of its sales from the U.S. and the rest abroad. British Petroleum, the biggest holding in the Morgan Stanley EAFE international index, has about the same sales breakdown, with 30 percent of revenues coming from the U.S.
Freedom To Roam
To be sure, advisors should not stop watching their foreign allocations altogether. Overseas markets do not always move in lockstep with Wall Street. So, for diversification, it is important to hold a mix of foreign and domestic stocks. To maintain some control of allocations, consider holding one or two free-ranging funds — while keeping the rest of assets in funds that clearly fall within style boxes.
A top free-ranging choice is Ivy Asset Strategy, a fund that can buy almost anything. With the bull market raging in 1999, Ivy had 100 percent of its assets in the U.S. Since then the fund has gradually shifted abroad, and now has only 34 percent of holdings at home. Convinced that growth in the emerging markets was accelerating, the fund began moving assets to China and India in 2003. The shift proved well-timed, and the fund has outdone the S&P 500 index by more than 7 percentage points annually during the past five years. Now Ivy is shorting the S&P 500 index, expecting stocks to drop in the U.S. “The mortgage problem has turned from a minor issue to a full crisis,” says portfolio manager Michael Avery.
Another wide-ranging fund is BlackRock Global Allocation. The fund has the freedom to place big bets on particular regions or asset classes. In 2002, BlackRock had only 19 percent of its assets in stocks — cushioning shareholders from weak markets. By 2004, the equity figure had climbed to 65 percent, a move that enabled the fund to benefit from bull markets around the world. In recent years, the fund has been shifting into Asian emerging markets. Asian holdings grew from less than 1 percent of assets in 2002 to 7 percent now. “We are positioning the portfolio to take advantage of the rising wealth of consumers outside the U.S.,” says portfolio manager Dan Chamby.
Investors seeking a global fund with a high yield might consider Thornburg Investment Income Builder. The fund's goal is to produce rising income. To do that, portfolio manager Brian McMahon often keeps most of his assets abroad. The fund currently yields 3.5 percent, and has only 36 percent of its assets in U.S. stocks. Because shareholders in many countries have traditionally demanded high dividends, foreign companies have felt pressured to pay out more of their earnings in the form of dividends, says McMahon. The portfolio manager particularly likes companies that have one or two major shareholders — the kind of investors that insist on big dividends. A favorite holding is Eni, an oil company that is part owned by the Italian government. “The government of Italy needs money, and wants dividends from its holdings,” says McMahon.
For a strong domestic fund with a foreign stake, try Excelsior Value & Restructuring. Portfolio manager David Williams looks for troubled companies that are taking steps to recover. Currently he has 17 percent of assets abroad. “I get interested in a foreign stock when it seems cheaper than U.S. counterparts,” he says.
Several years ago, Williams began buying shares of Petroleo Brasileiro, a big Brazilian oil producer. The company was beginning to cut costs, which seemed likely to produce better earnings. Since Williams began buying, the Brazilian producer has laid off employees and found new reserves, which boosted the shares.
Pioneer Cullen Value, another domestic bargain shopper, has 22 percent of its assets abroad. Portfolio manager Jim Cullen only buys stocks with price-earnings ratios that fall in the cheapest 20 percent of the market. To avoid losers, he sticks with unloved companies that seem poised to boost earnings. Lately he is finding some of the most attractive stocks abroad. “We see some of the best earnings growth coming from companies that can cut costs and compete in global markets,” he says.
A favorite holding is Gazprom, a giant Russian gas producer. Like other holdings in the Pioneer fund, the Russian company stands to benefit from growing global demand.
|Fund||Ticker||Category||Three-year Return||Five-year Return||% Category Rank Five-Year Return||Maximum Front-End Load|
|BlackRock Global Allocation A||MDLOX||World Allocation||15.2%||17.7%||25%||5.25%|
|Excelsior Value & Restructuring||UMBIX||Large Value||12.4||18.3||2||0|
|Ivy Asset Strategy A||WASAX||World Allocation||26.7||21.1||6||5.75|
|Pioneer Cullen Value A||CVFCX||Large Value||13.3||16.7||4||5.75|
|Thornburg Investment Income Builder A||TIBAX||World Allocation||18.9||N/A||N/A||4.50|
|Source: Morningstar. Returns through 11/30/07.|