David Hultstrom of Financial Architects, LLC of Woodstock, Ga., definitely keeps an eye on the bottom line as he squeezes out the advantages of foreign investing on behalf of his clients, watching everything from the expenses involved to currency hedging.
Hultstrom, who’s been using ETFs, mutual funds, bond funds and REITs to bring in exposure to ex-U.S. investments since he founded his firm 10 years ago, said that while the purpose of international diversification is, of course, to provide “diversification from the U.S. … adding international large-cap stocks doesn’t give much bang for the buck, so we use international emerging markets value [funds,] international REITs and international bond funds as a hedge…. The reason for the value tilt is to increase value [in the investments]. In markets with bubbles, if you get the value slice, you’re less likely to get sucked into bubbles.”
He’s also cautious on the other end of the spectrum, avoiding hot trends and riskier ventures.
“In general,” said Hultstrom, “anything that’s hot, be suspicious of it. If it’s a new acronym, don’t do that.” So BRICS are off his list.
While the proportion of foreign holdings in his clients’ portfolios runs about 20% to 25%, he acknowledges that that’s not exactly in line with the “academic view,” which he said is “how you invest is weighted exactly to how things are weighted in world.”
If one followed that strategy precisely, he said holdings would be “exactly market-cap-weighted to everything in the world, and the U.S. is about 50%. So that implies [holdings of] 50% U.S. and 50% the rest of the world.”
However, Hultstrom’s client portfolios are more heavily weighted toward domestic than international.
“You get most of the bang for the buck by the first slices of something different,” he said. “Most people [in the U.S. invest heavily in the U.S. And] if you’re in the U.S. and the market does well, your peers are largely U.S. investors and they will do well…. So as a hedge against [not doing as well as those] other people, you would want to invest more in the U.S. [than in international].”
Hence that 20% to 25% proportion.