Earlier this week, I penned an article that questioned whether investors could achieve the benefits of low correlation in their holdings by owning shares of foreign companies in concert with domestic stocks. My conclusion was that it is increasingly difficult to benefit from foreign exposure because of synchronization of world economies.
It may no longer be sufficient to buy a couple of European stocks or a foreign fund to be considered internationally diversified. This is not to say you should avoid these areas necessarily but simply that stocks such as AstraZeneca (NYSE:AZN) or Total SA (NYSE:TOT) may not zig very much when the U.S. market zags.
One way to diversify internationally is with emerging markets. But in that same breath (or at least the next one), I should mention that while emerging markets' volatility should partially offset, or at least buffer, the volatility of our own market, emerging markets come with their own set of unique risks, some of which are much greater than the risks inherent in industrialized country investments.
Nonetheless, comparison charts plotting general index ETFs for Brazil, South Korea, and South Africa against the S&P 500 show beautifully little correlation. Not only is this good in mathematical abstraction, but also low correlations are a big part of why we invest beyond our borders in the first place and are the essence of the diversification benefit.
But this diversification isn't the only compensation offered to investors who dare to invest in companies with names they can't pronounce. Often companies from emerging markets have low valuations and good dividend yields -- benefits of the low prices the market gives these companies on account of their increased risk.
There are specific names I've come across that are tied to the three countries mentioned earlier: Petroleo Brasiliero (NYSE:PBR), trading at 7 times trailing earnings and with a 2.3% yield; Korean Electric Power (NYSE:KEP), at 5 times trailing earnings and sporting a 3% yield; and South Africa's own Sasol (NYSE:SSL), trading near 13 times trailing earnings and with a 3.75% yield.
While any of these companies could take a hit, it won't be on account of a speculative valuation. But if emerging markets are not your cup of ramen, then there is another way to add international diversity to your portfolio.
I believe that commodity-based economies, such as Australia, New Zealand, and Norway, offer the potential for proper diversification. Australia and New Zealand probably make sense for all the various metals mined there, but Norway? As it turns out, Norway is the second-largest non-OPEC oil producer. While there is no ETF for Norway, a comparison between Statoil (NYSE:STO) -- the largest component of and, presumably, a good proxy for Norway's OSE All Share market -- and the S&P 500 shows a fairly low correlation between the two.
Fool contributor Roger Nusbaum is a portfolio manager in Phoenix. At press time, neither Roger nor his clients owned any of the stocks mentioned in the article.
