An advisor who invests in international financial markets faces the same set of considerations as a multinational company that does business in other countries. That means, opportunities aside, that what matters above all else are transparency and the rule of law, said Larry Elkin, founder and president of Palisades Hudson Financial Group.
“As an investor, I should be able to walk into any court anywhere in the world with my counterparty and expect fair treatment,” Elkin said. “I don’t have to agree with everything a country says, but I do I need to trust their systems to treat me fairly.”
Elkin applies this one overriding principle to all of his international investments and to every mutual fund he selects for his clients. “We look at very closely at the geographic distribution of the mutual funds we use for our clients and we really drill through them,” Elkin said. “If a fund happens to be heavy in a jurisdiction we think is unreliable or unstable, then we will not invest in it. We might accept a 2% incidental exposure to a country we’re not comfortable with, but not, for example, 15%, because that isn’t incidental; that’s just ignoring what’s really going on in a particular jurisdiction.”
Russia and China are two countries that just don’t make the grade, as far as Elkin is concerned, and to the extent that a fund has significant exposure to Russia, it won’t be chosen for investment.
Of course, it’s hard these days to find any investments that aren’t in some way linked to big countries such as China, given the magnitude of the Chinese economy. Just about any company in the world has some sort of China connection, but Elkin avoids too much of an exposure by staying away from those stocks that are listed on Chinese exchanges, for instance (not that it’s easy to get those stocks anyway), and keeping his China exposure to a minimum.
Still, an investor in overseas stocks isn’t really buying countries: He or she is really buying companies, Elkin said, and everywhere in the world, even in unstable countries, there are strong companies that are well worthy of investment.
“Even in a good country with a lot of problems, what you are ultimately buying is a future income stream, and if a company has good products, a good business process, steady supply and a reasonably stable access to the market, that company would be worth investing in even if you don’t like the market in which it is housed,” he said.
Japanese multinational companies are a good example of this, according to Elkin. “It’s no secret that Japan has suffered a terrible macroeconomic climate for several years, yet Japanese companies have adapted very well to the conditions that they have had to operate in,” he said. “Furthermore, the decline in the value of the yen has boosted exports of Japanese companies, which makes investing in companies that have learned to do business in that challenging environment even more attractive.” Elkin typically invests 20%-25% of a client’s portfolio in international assets. While there’s a general predictability with larger enterprises, he also includes funds that invest in smaller cap companies, “although the U.S. is still one of the best environments to take a small company and make it big,” he said.