If you've followed the financial press for a while, you've surely heard of the great successes that the managers of the Harvard and Yale endowment funds have achieved. Respectively, they hold $35 billion and $23 billion -- together, that's more than the combined nominal gross domestic products of Uruguay, Cambodia, Armenia, Madagascar, Iceland, and Bhutan. The Yale fund grew by 28% in the recently ended fiscal year and has averaged about 18% over the past decade, while Harvard's fund earned 23% in the past year and has averaged about 15% over the past decade. I don't think I have to tell you that these are stellar results.

So how have the managers done it? Well, Smart Money magazine recently offered a breakdown of the target allocations of each endowment. Upon glancing at them, I was struck by one thing: Each devotes a lot of attention to areas outside the United States. Yale aims to hold 15% of its assets in foreign equity, which is the third highest category, after 27% for real assets (such as real estate, timberland, and oil and gas) and 17% for private equity. Harvard tops that international figure, by aiming for 19% in foreign equity, which is second only to real assets, at 31%.

An international boom
A glance at the performance of various foreign investment indexes gives us a hint as to how Harvard and Yale have been able to rack up such great gains. Many foreign economies have been booming in recent years. For example:

  • The Vanguard Emerging Markets Stock Index (VEIEX) fund is up 39% so far this year and has averaged more than 36% annually over the past five years. Its top 10 holdings hail from the U.K., Hong Kong, Mexico, South Korea, Brazil, Russia, and Taiwan.
  • The Vanguard European Stock Index (VEURX) fund is up some 14% this year so far and about 22% annually, on average, over the past five years.
  • Compare the numbers above to the S&P 500, up about 6% this year and a respectable 11.5% annually over the past five years.

What to do
So given this wake-up call that you might want to add some more foreign investments to your mix, how should you proceed? Well, you have lots of options. Here are a few.

  • You could just stick with American companies but add some big ones that do a lot of business abroad, so you can still get a lot of international exposure in your portfolio. McDonald's (NYSE:MCD) and ExxonMobil (NYSE:XOM), for example, each take in roughly two-thirds of their revenues from outside the States. As foreign nations grow (especially developing ones, such as China), so will the bottom lines of these companies.
  • You could seek out strong performers among international companies and invest in their stocks. This approach is a bit tricky, though, since you'll want to do a lot of research into each company's country. Many countries are riskier, politically and economically, than ours. And accounting standards vary internationally, too.
  • You could invest in one or more international index funds. The Smart Money article suggested the iShares MSCI EAFE (NYSE:EFA) exchange-traded fund. It represents the European, Australasian, and Far Eastern markets, and its top holdings recently included BP (NYSE:BP), HSBC (NYSE:HBC), Vodafone (NYSE:VOD), and Nokia (NYSE:NOK). It has gained roughly 14% so far this year and has averaged nearly 22% over the past five years.

So go ahead and be a smarty-pants, like those folks at Harvard and Yale. Look beyond our national borders for some handsome profits.

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Longtime Fool contributor Selena Maranjian owns shares of McDonald's and the Vanguard Emerging Markets Fund. Try any of our investing services free for 30 days. The Motley Fool is Fools writing for Fools.