Foreign markets scare American investors, who assume these venues carry greater risk than widely held equities, bonds and funds on Wall Street stock exchanges. But one portfolio manager thinks those fears are unfounded and he is busting five myths about international investing. In particular, his commentary for Kiplinger warns that failing to embrace global diversification may limit your portfolio's resilience and lower long-term returns.
Diamond Hill Portfolio Manager Krishna Mohanraj has built an impressive resume in the last quarter century. He joined the firm in 2012 after leaving a senior research associate position at Sanford C. Bernstein. He holds a science degree from University of Texas and a MBA from London Business School. Diamond Hill currently manages $30.1 billion in client assets.
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Mohanraj lists home country bias as the first obstacle facing American investors, especially after years of strong market performance. Many on this side of the Atlantic believe they have sufficient exposure to foreign markets because U.S. multinationals generate billions in overseas revenue. However, international markets comprise the majority of the world's publicly traded companies, largely untouched by most American corporations.
They are also spread throughout large and small economic zones, rather than concentrated in a few major markets, like China or the European Union. This geographical diversity offers access to sectors and countries underrepresented in the U.S. He points out that information technology dominates our markets while international indexes offer greater exposure to financials, pharmaceuticals and mining, among other segments.
Mohanji writes for Kiplinger that American investors also shy away from international exposure due to perceived geopolitical risk. Headlines about war, political turmoil and civil strife keep U.S. wallets closed and focused on more familiar American industries. He reminds investors it makes more sense to manage risk, rather than avoid it, and notes that foreign markets include stable economies like Japan and Germany, as well as hot growth venues like India and Brazil.
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Many U.S. investors believe overseas markets lack transparency and shareholder protections. Mohanraj busts this myth, noting many offer "legal frameworks and reporting requirements that rival or even match" U.S. agencies like the Securities and Exchange Commission. He adds that U.K., Australia and Western societies with shared legal heritage "provide a robust foundation for investor protection."
Even so, Mohanraj agrees that active surveillance is needed in foreign venues with poor corporate governance, weak disclosure requirements and/or poor capital allocation.
Currency fluctuations also unnerve American investors, who worry that volatility will limit returns, but he insists that currency movements tend to balance out across regions and over time. And, like Wall Street counterparts, Mohanraj pounds the Graham and Dodd table, telling investors to focus on fundamentals, looking for companies with competitive advantages, sound business models and growth potential.
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He also warns against currency hedging because it can be expensive and even backfire, diluting diversification benefits that come from international investing.
Finally, Mohanraj explains on Kiplinger that many investors worry about illiquidity, dissuading them from international exposure. He admits international stocks may be less actively traded than U.S. stocks but insists it's OK because global exchanges include thousands of companies, many of which are "large, well-capitalized and trade actively in their home markets."
As with other myths about foreign investing, Mohanraj expounds the virtues of active management in overcoming perceived obstacles, looking for opportunities with strong fundamentals and solid trading volume. This requires discipline, unlike U.S. passive investing, where many workers allocate 401(k) investments and walk away, often for years or decades.
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