Investing Overseas Is A Good Idea Right Now. You Can Do It With These Funds.

Investment is a risky business and the smartest investors decide in advance which risks are worth taking before investing. If you do not take risks, then you will never make money.

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There is no doubt that this has been especially true overseas. Kimball Brooker, the manager of the First Eagle GlobalSGENX –0.18% fund, has called the past 10 years “a lost decade” for foreign stocks. As a matter of fact, over the past decade, the MSCI EAFE index of developed-market foreign stocks has provided a total cumulative return of only 60% in contrast to a 227% return for the S&P 500SPX –0.33% index, which is a stock index of the United States.

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However, Brooker, along with his co-managers, is able to defend their investors by letting the fund know that First Eagle Global has the flexibility to invest anywhere in the world—including the U.S.—with the lowest level of downside risk. The fund's secret sauce, however, is its 11% allocation to gold bullion, which it believes will produce the greatest return with the least amount of downside risk. As Brooker pointed out, gold has often had its best decades in the past century when equities have suffered losses, as evidenced by the analysis of gold. There is a possibility that the fund will be a hedge." The fund only dropped 6.5% in 2022 due to inflationary conditions that favored gold, while the EAFE index dropped 14.5% and the S&P 500 fell 18.1% amidst an inflationary environment.

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In light of the volatility that is expected in 2023, even though we have passed the worst of the recent banking crisis, investors need a smoother ride. Knowing how a fund generates its returns isn't enough; investors need a smoother ride. The risk-control strategies of the fund should be clear to you, and you should know if they will work in the future. If you intend on investing in foreign markets, which are subject to additional currency, geopolitical, and economic risks, this is particularly crucial.

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As a result, you may want to consider foreign-stock funds now, if you have not already done so. This is a good time to begin diversifying your portfolio by getting some exposure to foreign stocks, since valuations are low overseas.

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How to Play the Trends

In general, emerging markets have outperformed the U.S. economy in the past few decades. According to a white paper published in January by managers Laura Geritz and Blake Clayton from Rondure New WorldRNWOX –0.16% fund managers Laura Geritz and Blake Clayton, in the last five years, the S&P 500 has advanced 355% and emerging markets have advanced 26%. In the period just before that, 1999 through 2010, emerging markets had increased 392% and the S&P 500 had increased 10%.

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In some cases, a larger reversal may already have begun. The exchange-traded fund (EFA) that iShares MSCI EAFEEFA +0.05% has seen a gain of 28%, including dividends, since Oct. 12, when many developed markets bottomed, through March 31, compared to a gain of only 16% for the S&P 500. As of Oct. 24, the iShares MSCI Emerging Markets –0.28% ETF (EEM) has recovered 18% while the S&P index has fallen 9%.

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The MSCI EAFE Value index, which compares foreign value stocks with those from developed markets, currently stands at 9.6 forward price-earnings ratios, while the MSCI EAFE Growth index is at 24.7, registering a huge gap between them. The MSCI USA Index, which is similar to the S&P 500, has 20.8 forward price-earnings ratios, while the MSCI USA Value is at 15.5.

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In recent quarters, Brandes International Small Cap Equity (BISAX) co-manager Mark Costa has stated that while value has begun to outperform growth, dislocations are still at extreme levels, he added. As Morningstar reports, the fund trades at a 37% discount to its average company's book value, a ratio that is 0.63 price/book, a number that is about one-fifth of the S&P 500's 3.3 ratio.

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Costa's funds trade in a wide range of currencies, including the Euro, the Yen, and in some cases Canadian dollars as well. Both a recovery of the value of his fund and a recovery in the currency will support the fund as well as increase its returns.

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A number of funds have managed to provide much more consistent returns through hedging their currency exposure, even though foreign currencies are currently cheap, and even though they are cheap now, foreign currencies always add to a fund's volatility.

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I recall that when the International Value fund was launched in 1993 and it was decided to invest outside of the United States, an additional currency risk presented itself, one that, in my opinion, was quite unmanageable when it came to currency risks. The manager of the currency-hedged TBGVX fund, Bob Wyckoff, has said that this was not an acceptable risk in his opinion. We studied empirical data over long periods for hedged and unhedged international indexes, and it became evident that simply exposure to foreign currency did not earn you any money. In order to be able to trade it successfully, you needed to be very good at it."

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According to Morningstar's Foreign Large Value fund category over the past ten years, Wyckoff's fund has experienced a standard deviation of 11.8%, which is equated to a measure of volatility, compared to the average fund's 16.1%.

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Furthermore, it has had an extremely low downside capture ratio of 68% compared to its benchmark over the last three years, which means that for every 1% fall in foreign markets during a down day, it fell by just 0.68% as opposed to the average category fund falling by 1.02%.

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It is also possible to invest in an ETF that offers currency hedging. For instance, iShares Currency Hedged MSCI EAFE (HEFA) is a fund that offers currency hedging, so if you are concerned about volatility, it would be a wise idea to invest in this fund. If, however, you prefer an unhedged fund, then now may be a good time to buy.