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March 19, 2013 at 09:19 PM
While diversification was the first thing that steered the wealth management firm Balasa Dinverno Foltz to international investing, according to Chad Carlson, there are plenty of other reasons to look to other countries for investing opportunities, both in bonds and in stocks.
Both Carlson and Itasca, IL-based Balasa Dinverno Foltz have “been around the block on international investing.” Balasa has looked abroad for opportunities since 1986, and Carlson’s experience in the sector spans a decade. A third of the firm’s portfolios are targeted toward foreign holdings, he said, “with a purposeful overweight to emerging markets.”
Regarding bonds, “we have recently chosen to increase our international positioning to get exposure to different interest rate environments in order to help us navigate the changing bond market dynamics,” he said.
What’s so attractive about emerging markets? They’re a study in contrasts when compared to developed markets. “The developed world—the U.S., Europe, Japan—are struggling to find some growth,” said Carlson. Emerging markets may log growth of 4% to 5%, whereas developed markets are lucky at present to grow by 1% to 2%.
Another reason is demographics. “The developed market demographics are of an aging market,” Carlson said, which is “scary.” Emerging markets are “working-age markets,” versus “retired” markets. “Emerging markets have a lot more going for them, and don’t have the burdens of Social Security and Medicare in place to slow growth,” he said.
“We look at all that stuff, but how we chose to implement [our investment strategy] is through broader baskets of diversified products,” Carlson said. He singles out Mexico as having “a lot of good things going on there,” although he concedes that “emerging markets and frontier markets are pretty risky to pick; there are political [hazards], governments get overthrown, and there are less strict reporting requirements for companies.”
The firm uses index funds and ETFs to take advantage of equity opportunities, as well as an emerging-markets local bond fund that looks likely to provide some currency appreciation opportunities as well. “Emerging market currencies look cheap compared to developed,” he said.
