If you get in on a great investing opportunity early on, before most other people see its full potential, it will often make you rich. That's the opportunity that's available from international stocks right now.
Combing the world for great investments
Global investing certainly isn't a new phenomenon. Yet although investors have been able to buy stocks from around the world for decades now, the availability and ease of buying international assets has led to a surge in demand.
In response to this phenomenon, many financial institutions have taken steps to position themselves better on the international-investing bandwagon. Although the approaches that these institutions are using to attract attention differ, they all share the same goal: increasing interest in global financial markets.
Longleaf kills a hedge
When it comes to mutual funds that specialize in international value stocks, it's hard to find a fund with a better long-term track record than Longleaf Partners International (LLINX). Over the past decade, the fund, which includes both foreign companies as well as U.S. stocks like Yum! Brands (NYSE: YUM ) and Dell (Nasdaq: DELL ) , has earned an average annual return of nearly 7%, beating its benchmark by over four percentage points and putting the fund among the top 4% in the international value category.
What many found problematic with the Longleaf fund had nothing to do with the fund or its investments. After all, holdings like Fairfax Financial (NYSE: FFH ) , Yum! Brands, and Ingersoll-Rand (NYSE: IR ) have held up fairly well since last fall's big market slide.
Rather, what has held some investors back is the fund's practice of hedging against currency exposure. When the dollar's value changes compared with a foreign currency, the value of foreign stocks changes in dollar terms. Most funds simply pass on those fluctuations in their daily fund prices. But Longleaf used hedging techniques to avoid currency impact, choosing instead to focus on finding stocks that would appreciate not just against the U.S. dollar but in local-currency terms as well.
Hedging works well when the dollar is strong, but holds back returns when the dollar is weak. That may have motivated the fund's decision to end its hedging practices. That will leave shareholders more vulnerable to a stronger dollar, but if the currency's prospects prove as bleak as many expect, then investors will benefit from the decision.
Kicking up allocations
On a less esoteric note, institutional investors are coming around to the idea that international stocks deserve a bigger amount of your portfolio's assets than they've traditionally received. Fund giant Fidelity has decided to up the amount of international stocks it includes among some of its asset-allocation funds.
For instance, look at Fidelity's Freedom 2050 fund. As part of Fidelity's target retirement series, this is the longest-dated fund Fidelity offers. Currently, it divides investors' money among domestic and foreign stocks, with 70% going to domestic stock funds and 20% to international funds.
Fidelity's proposal would have that international exposure rising to 30%. The net impact would be to increase the Freedom fund's investment in international funds such as Fidelity Overseas (FOSFX), which gives investors exposure to companies such as ArcelorMittal (NYSE: MT ) , Toyota Motor (NYSE: TM ) , and Rio Tinto (NYSE: RTP ) .
Even with the change, a 70/30 mix doesn't go as far as what some experts recommend in moving toward foreign stocks. What it does indicate, though, is that as appetites for foreign investments grow, you can expect those investments to perform better than out-of-favor U.S. stocks -- at least over the short term.
As more investors start to look overseas for the best investments, you don't want to get left behind. Although you'll always be able to find good bargains among U.S. stocks, arbitrarily limiting yourself to the domestic stock market means that you could miss out on the best investments that the world has to offer.