Morningstar analyst William Samuel Rocco offers the following five steps to help your clients take advantage of opportunity overseas:
Keep your near-term expectations in check -- Rocco says that it's unlikely that international funds will do as well over the next few years as they have over the last few. If clients are adding to their international exposure now, he says, they should plan to have at least a 10-year time horizon.
Confirm that you don't have too much international exposure -- Given the superior performance of overseas offerings, Rocco says, clients should check to see whether their overall foreign exposure at present exceeds the upper end of their internationalallocation range. They should be sure to take a close look at their world-stock, specialty, and domestic-equity holdings while doing so.
Check your smaller-cap and emergingmarkets stakes, too -- Clients should do more than tally up their overall international exposure. Rocco believes they should also check to make sure they don't have more foreign smaller-cap or emerging-markets exposure than makes sense. Mid-cap and small-cap names have been at the forefront of the international rally and emerging-markets stocks have led the way, so funds that are dedicated to such issues may very well have appreciated beyond your target-allocation ranges for these asset classes.
Don't forget about conservative foreign funds -- According to Rocco, clients who need to rebalance their overseas portfolios away from foreign smaller-cap or emerging-markets funds -- or who happen to need more overall foreign exposure -- should be sure to consider more conservative foreign large-cap vehicles. Although more aggressive foreign large-cap funds with sizable smaller-cap or emerging-markets stakes have tended to outperform in recent years, that won't always be the case.
Factor in taxes -- Finally, says Rocco, clients should be sure they factor in tax considerations as they reevaluate the international portions of their portfolios and make any necessary adjustments. Those who need to reduce their overall international exposure or who need to lower their supplemental foreign exposure should consider scaling back in their tax-sheltered accounts first. And, he adds, if they must rebalance using their taxable accounts, they should remember that it often is preferable to rebalance by making future contributions to non-international funds rather than by selling existing international holdings.