The Global Bet

Investors Who Look Abroad Should Use Caution

Six years ago, only about 8 cents of every new dollar flowing into U.S. stock funds was invested overseas. Silicon Valley and its microchip-studded stocks were the hot destination. Now, that number is hovering around 77 cents, as American investors look longingly at soaring returns in international markets.

Newcomers, such as retired federal worker Janet Laytham, who last fall put 1 percent of her assets into a Chinese index fund that had a 26 percent gain in three months, are adding to the rush.

"This is just mad money," said Laytham, who keeps most of her holdings in U.S. Treasury securities.

Many international stock indexes have outperformed their U.S. counterparts in the past few years. That's drawing more American investors who are seeking bigger gains and more asset diversification, and taking on more risk to get them.

"There's so many global leaders based outside of the U.S., it seems more and more . . . that limiting yourself simply to the U.S. doesn't make much sense," said Gregg Wolper, a senior fund analyst with Morningstar. Rising interest rates in Europe, the growth rate of developing countries and the fact that they are heavy on the hot commodities sector have also fueled the trend, he said.

But experts are advising caution because currency fluctuations can unexpectedly lower the value of investments and because there is far less transparency in most overseas markets. Regulations are generally less rigorous, as are accounting standards.

Investors have a total of $5.3 trillion invested in U.S. stock funds, including $950 billion in international stocks, according to AMG Data Services, a research firm that tracks fund flows. Although that only accounts for 18 percent, that total is growing rapidly as overseas gains outpace gains in U.S. markets and as globalization makes Americans more aware of foreign companies and products.

Last year, international funds had average returns of 26 percent, compared with 12 percent for domestic funds, according to Lipper, which tracks the performance of mutual funds. Funds that invest in emerging markets had gains of 32 percent. Gains have been even more dramatic in rapidly growing countries such as Brazil, Russia, India and China.

Some analysts and market observers say those strong returns can't last much longer. Steven Bleiberg, head of Legg Mason's global asset allocation team, said his staff began reducing its stake in emerging markets more than a year ago. A recent surge, he wrote in a December report, has only exacerbated what he thinks is an inflated valuation of emerging markets.

"We feel that they are a little too expensive for us," Bleiberg said in an interview, adding that he has been shifting his international emphasis to European markets.

Others, like David Ng, an assistant professor of finance at Cornell University, say individual U.S. investors are still not as diversified as they should be globally.

Ng, who recently co-wrote a study on U.S. investment in foreign equities, asserts that U.S. investors should have a portfolio similar to the composition of the global equities market -- about half foreign and half domestic. Other financial experts, like Francis Kinniry, principal of Vanguard Investment Counseling & Research, recommend 20 percent.