NEW YORK – Will they stick with it?
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Many investors are second guessing their decision to move into international stock funds, largely at the expense of U.S. stocks, in recent years. That's because fear is spiking about troubles in Greece and China, while the U.S. economy continues to trudge along.
Investors are feeling those big swings in global markets more now, after pumping $208 billion into international stock mutual funds and exchange-traded funds in the 12 months ended in May. Just $4.5 billion went into U.S. stock funds over the same time, according to Morningstar.
It's tempting to retrench and stick with just U.S. stocks given all the turmoil abroad. But many fund managers who have the freedom to invest anywhere in the world say the Greek drama and other travails haven't changed their view of world markets all that much. Not only are they sticking with foreign markets, they're using recent price drops to pick up European and other stocks at cheaper prices.
"It's not like we've thrown our hands up and said we've had to get out of Europe wholesale and come back in a year," says Peter Langerman, chief executive of Franklin Mutual Advisers. "There are some things that we liked that we continue to like, their prices have come down, and we like them more."
The Franklin Mutual Global Discovery fund, which invests $27.5 billion around the world and where Langerman is a portfolio manager, is nearly evenly split between U.S. and foreign stocks. To be sure, he doesn't downplay the impact of Greece's debt problems on European stocks. "It's a negative, even if there is a resolution, because confidence levels are impacted," he says. Even so, he adds that it's important to remain diversified.
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Among the reasons fund managers cite for continuing to look abroad:
— STOCKS ARE CHEAPER
Foreign stocks generally have lower prices relative to their earnings than U.S. stocks. Not only that, earnings for foreign companies may have more room to rise, making them look even more attractive, says James Hunt, portfolio manager of the Tocqueville International Value fund.
That's because U.S. companies keep more of each $1 in revenue as profit than foreign companies do. If those foreign companies can increase their profit margins, they can become more profitable without needing gains in revenue. That's key when a slow-growing global economy is restricting revenue for companies around the world.
Hunt recently bought shares of Syngenta, a Swiss maker of agricultural chemicals, in part on expectations that it can cut costs to boost profits, for example. Syngenta's stock has since shot higher after St. Louis-based Monsanto offered to buy it, but Hunt says the stock is attractive even if the buyout doesn't go through because Syngenta is under pressure to cut costs.
— ECONOMIES ABROAD ARE IN EARLIER STAGES OF RECOVERY
The Great Recession ended six years ago. That means this U.S. economic expansion has already lasted 15 months longer than the average expansion since World War II. Europe, meanwhile, has only recently exited its recession.
The European Central Bank and other central banks worldwide are also pushing more stimulus to help their economies, while the Federal Reserve is moving in the opposite direction. The Fed ended its bond-buying program and is considering when to raise interest rates.
That is getting Brent Puff, senior portfolio manager for global and non-US equity at American Century, to look more at European companies. He wants to invest in companies whose profits look set to accelerate, among other factors, and he says Europe is providing more opportunities.
Puff's American Century Global Growth fund owns French automaker Peugeot, for example. European auto sales returned to growth only last year following years of declines, and Puff sees more improvement ahead. U.S. auto sales have been climbing since 2009 and may top 17 million this year for the first time since 2001. That long record of growth means Puff sees less room for improvement.
His Global Growth fund is still more than 60 percent U.S. stocks, but the European portion has ticked up to 28 percent from 25 percent in March 2014.
— MOST STOCKS ARE INTERNATIONAL ANYWAY
Separating stocks into U.S. and foreign camps may be a useless endeavor because many companies are increasingly selling their products around the world. Apple, for example, is the biggest U.S. stock by market value, but 63 percent of its revenue came from outside the Americas last quarter. So does it still count as a U.S. stock?
That dynamic is why the American Funds family of mutual funds says that it pays as much attention to where a company gets its revenue as to where its headquarters is located, a concept it's pushing as the "new geography."