- The Washington Times - Monday, January 30, 2006

With your job, your house and probably a good chunk of your portfolio rooted in U.S. soil, it’s easy to make a case for investing overseas. How you allocate your dollars abroad is becoming more complicated, however.

A bevy of regional and single-country exchange-traded and mutual funds beckon, but broader funds are probably better suited for most small investors. Depending on your time horizon and appetite for risk, a case can be made for plunking anywhere from 10 percent to 40 percent of your total equity portfolio outside the U.S. Now, amid a growing range of choices and after several years of good performance abroad, investors are taking a closer look at offerings beyond core foreign funds.

“Everyone would agree we all should have international exposure,” said William Rocco, analyst with Morningstar Inc. “It’s common to have a foreign large-cap fund, a blend, value or growth depending on your preference … and more people are building two-fund international portfolios. But before you pick your second fund, you need to know what you have in your first fund.”

Because world stock funds tend to invest primarily in larger, more established companies, a small-cap foreign offering could be an excellent complementary holding. Another alternative, depending on the core holding’s geographic allocations, could be a fund focused on emerging markets. Most diversified world stock funds have at least 10 percent in emerging markets, but some invest up to 30 percent. If your main foreign holding is at the lower end of this range, a diversified emerging market fund could work well for you. But with one- and three-year annual returns topping 30 percent, analysts broadly think this area may be closer to a top than to a bottom, so step in carefully.

There are more than 75 diversified emerging market funds from which to choose. Among no-load offerings, T. Rowe Price Emerging Markets Stock is priced reasonably with an expense ratio of 1.27 percent, and it has thrived, turning in a 40 percent annual return over the past three years. Another no-load to consider might be an SSgA Emerging Markets fund, with annual expenses of 1.25 percent.

It’s easy to get sidetracked by the performance of specific regions or individual countries in the developing world. Aside from the fact that it’s risky to jump into any area of the market that already has seen several years of robust returns, narrowly focused funds add risks by limiting the sector and geographic exposure.

With annual gains of more than 50 percent over the past one- and three-year periods, Latin American funds have posted the best returns of any category. The downside is that most are essentially two-country funds, Mr. Rocco said, with 75 percent to 90 percent of their holdings invested in Mexico and Brazil. In addition, reflecting the opportunities in the region, Latin funds rely heavily on energy and materials, with limited exposure to other sectors.

Some see a unique opportunity to invest in the emerging countries of Europe, amid the ongoing expansion of the European Union, but few funds are focused on this area. Those funds that are centered on this area invest heavily in Russia and tend to be dominated by energy and telecommunications stocks. Among the limited offerings is the Metzler/Payden European Emerging Markets fund, which is somewhat typical in that Russia makes up a third of its portfolio, and 40 percent of its holdings are in energy.

A skilled work force, relatively cheap labor and proximity to Western Europe add to the region’s appeal, said Vlad Milev, analyst with Metzler/Payden.

Funds focused on Asia may be less volatile because there is a broader range of sectors to choose from, and greater diversity of markets — some more mature than others — including Hong Kong, China, Thailand, and India.

Narrowly focused funds like these might make sense for someone who already has a diversified multifund international portfolio: a good large-cap core holding, a small-cap fund and adequate diversified emerging market exposure. Then, if you think there is something interesting about a certain country or region, jump in — as long as you understand it’s a roll of the dice.

“Think of it as, instead of buying a tech stock, you’re going to buy a Korea fund,” Mr. Rocco said.

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