All those pundits who champion international mutual funds for U.S. investors have been looking pretty smart lately.
While domestic stock funds have struggled through a going-nowhere year, funds that buy stocks in Europe, Asia, Latin America and elsewhere have put up much better results.
The internationals' edge shows up not just for this year but in the three- and five-year numbers. After getting walloped for much of the 1990s, international funds have turned the tables on their domestic competitors.
Fund investors have noticed. Five of the year's 12 best-selling U.S. funds through July, as tallied by the Boston consulting firm Financial Research Corp., have been funds with an international bent.
They are the Capital World Growth & Income Fund (CWIBX) and the EuroPacific Growth Fund (CEUBX), both from Capital Group Cos.' American Funds group; Barclays Global Investors' iShares exchange-traded fund (EFA) of the Morgan Stanley Capital International EAFE stock index; the Dodge & Cox International Stock Fund (DODFX); and the Julius Baer International Equity Fund (JETAX). By my calculations, net inflows into these five funds have totaled $23.7 billion in seven months.
"So far in 2005, inflows to international equity funds have matched those of U.S. equity funds," says Avi Nachmany, research director at the New York consulting firm Strategic Insight.
In recent times, the international funds' share of the total pie has grown to about 18 percent from about 10 percent, Nachmany figures. "That's still way too low, in my view," he says.
Here are the investment performance numbers: From New Year's through August this year, 292 international equity funds tracked by Bloomberg gained an average of 6.6 percent, double the 3.3 percent gain posted by 929 U.S. stock funds of both the growth and value persuasions.
For the past three years, the internationals have posted an average annual gain of 18.3 percent, including dividends, compared with a 13.8 percent return for the domestic stock funds. Over the past five years, it has been internationals up 1.7 percent, domestic funds down 1.2 percent per year.
Might we catch a whiff of some possible excesses of enthusiasm here? Yes, indeed. Single-country and regional funds from India, Brazil and Eastern Europe have returned 75 percent to 100 percent over the past 12 months, and whatever goes up that fast is always subject to sobering reappraisal somewhere along the way. Remember the epigram: After fund doubles / May come toil and trouble.
There's also a natural tendency to see this shift as purely cyclical -- just another kind of global group rotation, in the parlance of institutional money management. As with big stocks and small stocks, foreign markets and domestic markets more or less take turns in the spotlight.
While nobody would deny the existence of this kind of cycle, a more interesting and important long-term trend may lurk beneath. It's a function of globalization, though that abstract term doesn't do it justice.
Economies such as those of China and India are thriving as they take an increasingly active role in the world economy. When the American consumer calls a help desk on his cell phone, technology has made it entirely practical for the people he is consulting to be on the other side of the globe, not just across town.
As we are constantly reminded, globalization is fraught with problems, none scarier than the notorious imbalances arising from one-sided cross-border flows of goods and payments. In this model, the United States risks weakening or even bankrupting itself by borrowing money from Asian nations to keep financing a nonstop spending spree.
Alongside those perils, however, come enormous opportunities. As the big-picture economy grows increasingly global, aren't its doors being opened to breathtaking growth possibilities? This growth brings increasing interdependence among national economies.
So while nations remain competitive creatures, they also have an increasing economic stake in one another's well-being, whether they like it or not. No wise enterprise wants its customers put out of business, either by its own doing or by anybody else's.
The day looks to be coming when it won't be necessary, or even possible, to compare domestic against international stock funds. To one degree or another, all will be global funds.