The clients are a married couple, age 65, both recently retired. Their $500,000 (non-qualified) equity portfolio consists solely of U.S. stocks and funds but they're convinced that foreign equities offer better long-term growth prospects.
They want to allocate $100,000 to foreign and international mutual funds. They don't need income from this money and are willing to invest more aggressively because want to leave the funds as part of their legacy for their children.
What research tools do you use to identify prospective funds for clients?
We use tools like Zephyr, Morningstar and Wilson Analytics. We also use simple online information sites available to virtually all investors.
What specific fund categories would you recommend for the scenario-clients' consideration and why?
We recommend international bonds as part of our portfolios. International bonds are affected by different risks than US government or corporate bonds They are more affected by changes in currency exchanges than they are by changes in domestic interest rate policy or by economic activity. Within international bonds we invest in both developed and emerging market debt.
Next, we recommend three different categories of international equities: large stocks, small stocks, and emerging market stocks. In each of these categories we further delineate by value, growth, and blend. Within emerging market stocks, we also invest in small and value.
Finally, we invest in international real estate to further diversify our real estate exposure. For all categories of international investing we tend not to invest in "global" funds that include allocations to US investments.
What specific funds and allocations would you recommend within those categories?
1. International bonds (0 to 10 percent of a total portfolio):
- T Rowe Price International Bond Fund (RPIBX): 40%
- American Century International Bond Institutional (AIDIX): 40%
- PIMCO Emerging Market Bond Inst. (PEBIX): 10%
- T Rowe Price Emerging Market Bonds (PREMX): 10%
2. International large stocks (0 to 10 percent of a total portfolio):
We tend to keep the allocation to this asset class around 5 percent.
It has a relatively high correlation to our U.S. large stocks so it does not add as much diversification as the other international equity asset classes:
- DFA International Large Stocks (DFALX): 65%
- DFA International Large Value (DFIVX): 35%
3. International small stocks (0 to 10 percent of a total portfolio with a bias toward 7 to 9 percent):
- DFA International Small (DFISX): 65%
- DFA International Small Value (DISVX): 35%
4. Emerging markets (0 to 10 percent of a total portfolio with an average around 5 percent):
- DFA Emerging Markets (DFEMX): 40%
- DFA Emerging Markets Small (DEMSX): 25%
- DFA Emerging Markets Value (DFEVX): 35%
5. International real estate (about 3 to 8 percent of a total portfolio):
- DFA International Real Estate (DFITX)
- EII International Property Fund (EIIPX)
- Morgan Stanley International Real Estate Fund (MSUAX)