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September 25, 2014 at 11:42 AM
If you ask Larry Luxenberg of Lexington Avenue Capital Management how long he’s been doing international investing in his clients’ portfolios, he’ll tell you it’s “been decades.” Back in those days, he used ADRs and mutual funds that participated in foreign investments; now he primarily sticks to open-end mutual funds and some ETFs.
“Foreign investments should be a significant part of most investors’ portfolios,” Luxenberg said. “Foreign stock markets represent more than 50 percent of world stock market capitalization and foreign markets have been growing faster than the U.S. in recent decades. While foreign markets have been more volatile than the U.S., their greater returns over time and value as a diversification outweigh this disadvantage.”
While he doesn’t favor particular regions, countries or industries, he does aim for global diversification—something that he strongly believes in. “I often come across clients who have specific investments before they start working with me,” he said, “but I try to get them to take a more diversified approach.”
As a rule it works well, although he said sometimes clients do push back on emerging markets. But diversifying doesn’t mean a scattergun approach, either. “I had one client in particular who had ETFs in a dozen or more countries, but the net effect of that is not as diversified as some open-end mutual funds. And that kind of investing leads to a hodgepodge portfolio and doesn’t let you achieve [the results you’d get from a more focused approach],” he said.
The rest of the world may take up more than half of global stock market capitalization, but Luxenberg said for the past five years he’s aimed at keeping about a third of the portfolio in foreign markets, in a combination of developed countries and emerging markets.
While the exact proportion of markets made up of countries other than the U.S. has seen “some fluctuation over that period,” he said, with the U.S. weighting moving between 45–50%, the changes have not been “significant enough for me to change” the ratio in the portfolio.
