Are Your Clients Ready To Take A World View? Advisors need to temper enthusiasm with a systematic approach
By Jim Connolly
Advisors confidently can tell clients who want to invest outside the United States that it truly is a big, open and profitable world, mutual fund experts say.
The numbers back experts assertions. Worldwide mutual fund assets totaled $14.47 trillion at the end of third quarter 2004, according to data from the Investment Company Institute, Washington. That number is 24.2% higher than the $11.65 trillion posted in fourth quarter 2001. The ICI also reports that 44% of those third quarter 2004 assets were in equity mutual funds.
However, mutual fund executives say advisors have to channel enthusiasm and keep some key points in mind before helping clients select an international mutual fund or subaccount within a variable insurance product.
A starting point, they emphasize, is to know your practice and, hence, your client.
“How specialized is the advisor or client able to be?” asks George Greig, a portfolio manager with Prudential Financials Strategic Partners International Growth Fund, Newark, N.J. A general purpose international fund can offer investors broad exposure to international markets, he says.
Mike Cantara, an associate portfolio manager with MFS, Boston, says, “The most important thing is that there are good opportunities and value in the non-U.S. market that make a compelling case for investing in them.” There are many companies outside the U.S. which have discounted valuations, he adds.
Something between 45-47% of the worlds market capitalization is outside of the United States, and that rises to 70-72% if measured by company, according to Cantara.
A well-diversified portfolio is the best way to participate in this growth potential, he says. So, typically, 15-20% of a clients total portfolio would be invested in non-U.S. investments, he says.
Nationwide Financial, Columbus, Ohio, looks for portfolio managers for its investment products with a focus on diversified international funds rather than narrower slices of the international sector such as single region or country funds, says Ed Riley, Nationwides director of investment research and analysis. The reason, he explains, is that typically, Nationwides clients do not want to invest in funds that are excessively risky.
“A very systematic approach to the international market” is needed, says Michael Perelstein, senior portfolio manager with American Century International Growth Fund, Kansas City, Mo.
It is better to have a core allocation in a broad fund with the remaining portion sprinkled among higher risk investments such as emerging market funds, he explains.
The temptation for some investors, according to Perelstein, is to “cross the risk threshold internationally and go all the way and gamble on the most risky elements.”
He cautions advisors whose clients want to weigh exclusively the international portion of their portfolio in emerging markets. “It would be the equivalent of having a U.S. stock portfolio and only investing in the NASDAQ. It would be a very difficult ride.”
However, he adds, “The nice thing about international stocks is that there is quite a large universe of countries and cultures, stocks and sectors to choose from.”