Buy foreign stocks via mutual funds

Nestle, Toyota, British Petroleum, Nokia — all great companies, based outside the United States. But what’s the best way to own them?

You could buy these stocks outright, but most investors are likely to feel more comfortable buying shares of mutual funds focused on overseas companies.

How much of your portfolio you send outside U.S. borders and what funds you choose depends on how much you have to invest and your stomach for risk.

But even if you are nervous, you should consider some overseas stocks — with so many investment opportunities outside the United States, you are missing out if you restrict yourself to domestic holdings, said William Howard, a certified financial planner in Memphis, Tenn.

“Most individual investors don’t have enough money to buy individual international stocks, nor do they have time to keep up with how those companies are doing,” Mr. Howard said. “A mutual fund is instant diversification with professional management, and you can invest in smaller dollar amounts.”

For the average person, financial planners say it’s appropriate to put about 10 percent of your total investments in international equities for the sake of diversification. If you have a larger portfolio, are a younger investor or prefer a more aggressive approach, you could invest up to 25 percent of your holdings overseas.

A more straightforward reason to spread out your investments is simply that many of the world’s best companies are not based in the United States, said Gregg Wolper, senior fund analyst at Morningstar Inc.

“Whether you’re talking about the mobile phone industry, or beverages, or oil, there are companies out there that are among the world’s leaders,” Mr. Wolper said. “You will find foreign companies among the top firms in the world. So it makes sense to open yourself up to the chance to own some of these great companies.”

As with any securities investment, putting your money overseas carries some risk. Currency changes may make international funds more volatile, and companies outside the United States could face less rigorous regulatory oversight. Higher transaction costs could also eat into your returns, said Gary Schatsky, a fee-only financial planner in New York.

International equity funds tend to have higher expense ratios — the percent of the fund’s average net assets that go toward operating costs and management fees — about 1.85 percent on average, according to Morningstar, as opposed to about 1.51 percent for domestic equity funds.

“Fund managers would say that’s because they have difficulty managing and reviewing all the international issues,” Mr. Schatsky said. “A cynic might say it’s because there’s less competition than there is among domestic funds. The answer probably lies somewhere in between.”

If you are starting off with limited exposure to international stocks, advisers say a well-managed fund covering a broad geographic range is better than a region- or country-specific fund.

“Whenever you make a sector bet or a country bet, you’re getting away from the fundamentals of the business and you’re limiting your choices,” said Steve Wetzel, a certified financial planner in Yardley, Pa. “I don’t like sector funds in this country for the most part either.”

Some pure foreign funds with good long-term performance records and stable management include Artisan International, which has an expense ratio of 1.21 percent and a minimum investment of $1,000; Julius Baer International Equity, which has an expense ratio of 1.43 percent and a minimum investment of $2,500; and Longleaf Partners International, which has an expense ratio of 1.8 percent and a minimum investment of $10,000. Morningstar has given its five-star rating to all three, meaning they’re in the top 10 percent of the funds it tracks.

Most traditional international funds are about 60 percent to 65 percent invested in European companies, about 15 percent in Japan and between 8 percent and 9 percent in emerging markets, Mr. Wolper said. If you are already invested in a broad international fund and are willing to take on more risk, you might further diversify by investing in funds focused on emerging markets or international small-cap stocks, which may offer more exposure to Asia.

“A lot of the growth is coming from that part of that world,” said Bob Glovsky, a certified financial planner in Boston. “Think about where a lot of our jobs are going … to India, to China … these are great opportunities.”

However, Mr. Glovsky and other planners say you should focus on Asia only after you’ve established a core position in international equities.

ASSOCIATED PRESS