International mutual funds should be a part of every investor’s portfolio. I’ve beaten this drum before (see A Euro, A Yen, a Buck or a Pound and The CIA Guide to International Investing).  But when the cover of BusinessWeek asks: What’s the Most Extreme Emerging Market on Earth?  (remember the Sports Illustrated curse) I begin to get a little nervous. Let’s stick with China for a minute. The Hang Seng (Hong Kong stock market) is up 30% in the past year. This is against a current back drop of Chinese government concerns about their stock markets becoming too speculative, widening the trading range of the Yuan, and possible U.S. trade limitations.  

 

International markets will go down at some point in time and I take the above as warning signs that a correction might occur sooner rather then later. Does this mean you should sell your international mutual funds or not buy, if you don’t yet own any? No. What it does mean is – don’t get carried away.  Markets that have risen the most are most likely to correct the most AND markets of “newer economies,” i.e., riskier economies/counties, will be more volatile then the markets of mature economies.

 

I (being very American) lump the world’s economies into four categories (with representative examples): 

1. Mature - Germany, Japan.

2. Big New - China, India.

3. Emerging - Vietnam, Egypt.

4. All Others.

 

I’ll leave it to you to fill in the rest of the counties in each category (maybe you can tell me if Russia fits into 2 or 3). Volatility in a nation’s markets increases as the size and maturity of those markets decreases. An analogy is U.S. Big Cap, Mid Cap and Small Cap stock funds. Investing internationally is no different then investing in the U.S. – understand the risk and diversify.

The world’s second biggest economy is Japan (behind the good ol’ USA). China, India, and Brazil have economies growing at 10%, 8%, and 3% (probably underestimated), respectively. That’s a lot faster then the roughly 2.5% expected US growth over the next year or so (absent a recession, of course). Together those three economies almost equal the US in GDP (as measured by official exchange rates). Add in Japan, and the combined GDP of these four countries exceeds the US. The CIA’s World Factbook is an excellent source of country information like this.

 

What’s my point? A good mutual fund investor would be wise to have at least 25% of his or her assets invested outside the US.  Global investing makes sense not only to avail oneself of higher growth rates but also because national economies, and international markets, many respond differently to the same event or over time. I’m not suggesting that the global economies aren’t linked, and becoming more so, but there still are differences based upon GDP growth and other national factors.

 

Where to start? Which counties do you think are attractive investments, i.e., their economies will grow. What are the opportunities in Mexico (domestic demand)? Canada (natural resources)? Germany (banking and automobiles)? Then, like with every other investment decision, consider the riskiness of the investment. Canada and Germany are pretty safe. Russia, for example, is another high growth economy, clipping along at 7% per year but probably a riskier investment. Egypt’s stock market is up 7% year-to-date (as compared to 2% for the Dow) reflecting the country’s 6% GDP growth rate, but Egypt’s also a riskier bet.

 

There are many excellent international mutual funds, some invest globally, some focus by region and some by country.  International funds invest in all sizes of companies and all classes of debt. Click on MUTUALdecision and you can find the top international funds or use our Mutual Fund Research Tool to select the international fund best suited to your investment objectives.