June 2, 2014 / 3:51 PM / 4 years ago

What's the best basket for global stocks?

CHICAGO (Reuters) - A stimulative monetary program in Europe and the U.S., combined with continued growth in Asia, are proving to be a potent trio for global investors.

But you have to be selective with mutual- and exchange-traded funds to ensure you have a broad basket for capturing global returns.

If you already have funds that represent the bulk of the U.S. stock market, you don’t need to duplicate those companies in a global portfolio. Funds that stipulate “ex-U.S.” - that is, they exclude U.S. stocks - can ensure you’re well positioned outside of America.

One of the least-expensive ways to invest outside of the U.S. is to hold a fund like the Vanguard FTSE All-World ex-US ETF. The $12.5-billion-plus fund holds international giants like Nestle SA, Roche Holding AG and Toyota Motor Corp..

The Vanguard fund is up nearly 16 percent for the 12 months through May 30 and 3 percent year to date. It charges 0.15 percent annually for management expenses.

A similar fund with most of the same holdings is the iShares MSCI ACWI Index ETF. Like the Vanguard fund, it invests in a passive index of global stocks, only with slightly better results. It’s up almost 18 percent for the past 12 months and more than 4 percent year-to-date through May 30. It charges 0.34 percent in annual expenses.

For a more active approach, consider the Oakmark Global Fund I, a mutual fund that owns some U.S.-based companies like General Motors and Oracle Corporation, but also holds lesser-known European stocks like Julius Baer Gruppe AG and CNH Industrial N.V. The fund is also heavily concentrated in two growth sectors: financial services and technology.

The Oakmark fund is up almost 18 percent for the past year and nearly 4 percent year-to-date through May 30. It charges 1.1 percent in annual expenses.


For investors with a tunnel-vision focus on U.S.-based companies, the global investment strategy may come as a surprise: Some 98 percent of all jobs are outside the U.S., as well as 96 percent of the people and 77 percent of the global economy, according to Bob Froehlich, an economist who’s on the board of Highland Capital Mutual Funds.

“You need to follow the economic activity,” Froehlich advises, “Yet there’s a disconnect with most investors, who have a lack of global investments in their portfolio.”

Indeed, if current trends continue, the most robust growth will happen outside of the U.S., according to projections from the International Monetary Fund.

While the U.S. economy is expected to grow 2.8 percent this year, the IMF forecasts that emerging markets and developing economies will grow 5 percent this year and 5.4 percent next year. Developing Asia is pegged to expand nearly 7 percent, led by China and India.

The rising tide of positive economic growth is testing stock-market highs not seen since 2007, most notably in the U.S.-based global companies. Low inflation, rock-bottom rates and easy monetary policy from the U.S. Federal Reserve and European Central Bank are feeding the rally.

In the face of this optimism is a large dollop of uncertainty. Although Europe is enjoying low inflation, it’s far from out of the woods - it’s posting meager growth with high unemployment. China’s fast-paced economic expansion is also a concern, along with a civil war in the Ukraine and tension in the South China Sea.

Of course, anything can happen on the global stage to upend the general good will towards international companies. Even with diversification, volatility can be widespread.

Don’t forget to hold U.S. and international bonds and real estate to offset the stock-market risk. The Vanguard FTSE fund, for example, lost nearly 44 percent of its value in 2008 and 14 percent in 2011; both losses were worse than the S&P 500 Index’s returns in those years.

For North American investors, holding 20 percent to 30 percent in non-U.S. stocks will position you to reap global growth. The key is to hold long-term and recognize that despite the virtues of diversification, foreign markets can be highly skittish.

(The writer is a Reuters contributor. The opinions expressed are his own.)

Editing by Lauren Young and Bernadette Baum

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