Gary Stringer, president & CIO, Stringer Asset Management; Memphis, Tennessee:
We tend to focus on mid- and large-cap names when considering foreign equity markets. Liquidity is always a key concern for us, so emphasizing larger names helps alleviate some of that concern in these foreign markets, which tend to have less trading volume than the U.S. equity market.
It’s important to remember that accounting standards differ overseas, so we have some concerns over earnings reporting. As a result, we tend to favor dividend payers. Nothing says “earnings consistency” like a nice, stable and growing dividend. We look at other “smart beta” strategies as a complement to our foreign dividend orientation.
Finally, we split our foreign exposure between developed markets and emerging markets, while avoiding frontier markets. Again, liquidity is a concern for us, and we find less liquidity in frontier markets than just about anywhere else. And that’s in addition to the political and other risks associated with frontier markets.
We consider emerging markets to be a tactical, short-term decision due to their heightened risks compared with developed markets. The current lofty valuation levels reduce potential returns relative to risk, so we find emerging markets unattractive at this time.
Foreign currency exposure is always a consideration when investing in foreign equity markets. The recent U.S. dollar slump is temporary, and we expect the U.S. dollar to regain strength primarily on divergent central bank policies. However, we do not see the U.S. dollar rallying like it did two years ago, so we have hedged only a portion of our foreign currency exposure.
Right now, we like the WisdomTree International Equity Fund (DWM) and the Goldman Sachs ActiveBeta International Equity ETF (GSIE) for our core foreign equity exposure.
Ben Doty, senior investment director, Koss Olinger; Gainesville, Florida
If you’re trying to gain a "neutral" exposure to international stocks, a good proxy is the MSCI ACWI ex USA Index. The first decision is how much of a nonhome bias a portfolio will have—a minimum of 25% is reasonable, especially since international stocks make up about half of the investable universe in terms of public market capitalization.
At our firm, however, we prefer to disaggregate a "neutral" exposure into several different investments that can add to the return outcomes of an international asset allocation. For example, we have tilts toward value stocks, infrastructure stocks, emerging market stocks and international small- and midcap stocks.
These tilts will likely earn long-term returns that exceed that of foreign developed large-cap stocks. These exposures are typically easy and inexpensive to acquire. Broad emerging market exposure, for example, can be had through the Schwab Emerging Markets ETF (SCHE) at a cost of only 0.13%. We invest in SCHE.
Since many ETFs don’t have a very long history, it’s important to have an underlying index history rich enough to observe relative return and risk. In international investing, it’s important to know what and why you’re buying, more so than it may be in domestic markets.
In SCHE, for example, there is substantial exposure to financials and energy. Some investors may not like that. Instead, they may prefer an ETF with more exposure to consumer goods and the so-called rising middle class in emerging markets.
Smart-beta investing works in international markets as much as buying low increases the likelihood of higher future returns, even though smart-beta investing in foreign stocks is not packaged in enough ETF structures as of yet.
Contact Cinthia Murphy at [email protected]