subject: Global Investing and the Ugly American Economy That is [print this page] Global Investing and the Ugly American Economy That is
Having lived through the recent U.S. and global economic crisis that is closely tied to the housing, subprime and derivatives markets, many investors are reassessing "risk." Recently the diversified portfolio managers at FIM Group presented a webinar titled "Security vs. Risk," in which we addressed various risks facing investors. One of the areas we touched on was the risks surrounding foreign investments, but we did not address it in detail.
A client recently asked me, "Why do I have so many investments in companies whose names I don't recognize? Aren't foreign investments risky?" This is a very timely question given what the US and some likeminded foreign countries have recently experienced, contrasted to what many other countries avoided and the new landscape that has resulted.
Conventional wisdom used to be that "foreign" investments possessed more inherent risk and, in some cases, correspondingly more potential opportunity than U.S. investments. Part of the paradigm that supported this theory was structural. The US-based financial system had the strongest footing, the regulatory environment was among the world's most dependable, the currency was among the world's strongest and the bulk of goods and services US consumers purchased were manufactured in the U.S. While many "truths" about the opportunities inherent with international investing are as valid today as they have ever been, these risk factors have certainly changed.
On the timelessness of the benefits of international investing, one of the greatest investors of all time, Sir John Templeton, the father of global value investing, had returns that averaged nearly 14% per year for the 50-year period between 1954 and 2004. He felt investors were foolish to limit themselves to any specific country. He said, "All investing is global," and that was in the 1930s! This openmindedness is more important now than at any time in history given the turn of events developed countries have suffered in the past few years.
It used to be that the countries with questionable accounting practices, excessive use of leverage, banking systems teetering on the edge of disaster, eroding currencies, and problems with inflation and deflation were "foreign" and so-called "third-world." The tables have turned dramatically.
Major banks in countries like Singapore, South Korea, China, Taiwan, Hong Kong and Brazil did not participate in mortgage-related leverage, derivative and credit default swap investing and irresponsible lending nearly to the extent Western banks did, if at all. Their governments have not chosen to bail out their businesses by taking on huge amounts of debt and deficits. Their financial institutions are now much less leveraged, their currencies stronger, economies healthier and governments less indebted than ours. Inflation is in check, and their economies are positioned to thrive. One might invert this question and ask whether it makes sense to have a large portion of one's wealth invested in the US!
All of this begs the question of what is the difference between domestic and international investing anyway? Is there even a logical distinction to make between the two? Are General Electric, McDonald's, and Johnson & Johnson US companies? Based on the sources of their revenues, they should actually be considered non-US companies.
The upshot of all of this is that the percentage of a diversified portfolio that is domestic versus international is not a question worth pondering. As investors, it makes the most sense today, just as it did for the past six decades since Sir Templeton began investing outside of the U.S., to invest where there is the best risk-adjusted opportunity and not to impose arbitrary limitations on how much or how little should or should not be invested in a country, region, asset class or any other cookie-cutter recipe approach that tries to oversimplify and compartmentalize the complex process of investing and investment management.
P.S. And what's with those Europeans criticizing American fast food? At $9,273 million, they consume $1.3 million more McDonald's food than Americans do.
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