From the July 2006 issue of Investment Advisor • Subscribe!

July 1, 2006

Steady At The Helm in Rough Seas

Following a volatile but vertical course, international stocks have rocketed upward over the last decade, with a sustained rise since March 2003. Global demand for commodities produced in the emerging markets, and stable growth in Europe and elsewhere, have pushed international equity funds up 28.9% for the 12 months ended May 31, 2006, while the S&P 500 rose 8.6%.

A sell-off in international equities that began in mid-May, especially in emerging markets, may spell the temporary end of the boom. "Fears that rising inflation will lead to tighter global monetary policy in the U.S., Europe, and Japan, as well as key emerging markets, are leading investors to believe that global economic growth will slow, and earnings with it," said Alec Young, S&P equity market strategist.

Although "significant," this correction is neither surprising nor unhealthy, in that the market hasn't seen a 10% drop for three years, Young added. Nor do its short-term, cyclical concerns undermine the outlook for long-term secular growth internationally. Thus, Standard & Poor's continues to recommend placing 20% of one's portfolio in foreign equities, including 3% in emerging market stocks--a stake small enough to contain potential losses.

One of the best performing funds in this sector, the all-cap Janus Overseas Fund (JAOSX), soundly beat its peers during the recent 12-month period, raking in 54.3%. The fund also excelled over the three-year period with a 33.2% gain, compared with 23.2% for peers. Seeking investments based on opportunity rather than geography, the fund has placed a large chunk of its holdings in emerging markets such as Brazil and India, compared with 24.2% in European countries, helping to juice up returns. In exchange, the fund bears a substantially higher volatility than its peers.

Alliance Bernstein International Value Fund/Advisor (ABIYX) has been the star performer over five years, returning 18.2%. The fund invests in more than 40 industries and in over 40 developed and underdeveloped markets. Its value methodology selects stocks that are undervalued in light of their future earnings power, with an eye to diversifying overall risk in the portfolio.--Carol A. Wood

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