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Global Stock Funds
As the global economy continues to grow and expand, so do the investment opportunities and possibilities for higher returns. Remember, investments offering higher returns generally involve higher risks.
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Global Stock Funds Cover a Lot of Territory
Global equity funds are often subdivided by where they invest. Some of the most common categories are:
Global equity funds. Sometimes called world equity funds, they typically have the broadest investment mandates and are usually able to invest anywhere in the world. They may invest a significant portion of their assets in the United States and the developed markets of Europe and Asia. If constrained, they usually avoid exposure to the less developed markets of Africa, Latin America, Asia and Eastern Europe.
The ability to invest anywhere in the world is the biggest advantage global equity funds offer because they have the greatest number of stocks to choose from. Investing globally, however, may involve higher risks depending on market conditions, currency exchange rates and economic, social and political climates of the countries where the fund invests.
International or foreign equity funds. These funds invest outside the United States. Typically, they primarily invest in the developed markets of Europe and Asia. Depending on their strategy and investment guidelines, they may also invest in emerging markets.
By investing outside the United States, these funds can potentially capitalize on different economic cycles occurring in different countries at different times, thereby complementing funds that invest primarily in the U.S. Investing abroad, however, may involve higher risks depending on market conditions, currency exchange rates and economic, social and political climates of the countries where the fund invests.
Regional equity funds. As the name suggests, these funds concentrate in a particular region of the world. For example, a regional fund may focus on the stocks of Europe, Latin America or Pacific Rim nations. Such a focus can be rewarding if the region is experiencing high growth rates, as has been the case in Asia at various times over the last two decades.
However, the limited geographic scope of these funds may increase their volatility as negative events in one country often spill over into neighboring countries, dragging down the region as a whole.
Country-specific equity funds. These funds have very specific investment mandates that restrict the majority of their investing to a single country. Typically, they focus on a country with a significant stock market or stock market growth potential. A narrow focus, however, can substantially increase risk.
Emerging markets funds. These funds invest principally in the less developed markets of Africa, Latin America, Asia and Eastern Europe. Typically, these types of regions are undergoing dramatic economic change, such as transforming from a state-run economy into a free-market-based economy. Compared with more mature markets, investing in emerging markets regions may offer the potential for sharp growth rates.
However, emerging markets regions also involve heightened risks, related to their smaller size and lesser liquidity, as well as currency fluctuations and more tenuous economic and political climates. As a result, such funds can experience significant volatility.
Additional characteristics. In addition to distinguishing themselves by where they invest, global funds, like their U.S.-only counterparts, may have a sector focus, a market capitalization range or a value or growth bias.
Familiar Names from Foreign Places
Investors often focus on U.S. stocks and equity funds because they're unaware that numerous products are from companies that are actually foreign based or owned by an international parent company.
For instance, while many recognize that Japanese electronics have made strong inroads into U.S. markets, many may not realize that even names such as RCA (which once stood for Radio Corporation of America) is actually a brand now belonging to the French company Thomson. Conversely, many products thought of as foreign are actually produced by U.S.-based companies.
With so much global integration taking place, limiting investments to U.S.-only mutual funds also means eliminating potential opportunities from around the world.
A World of Opportunity
Foreign markets have expanded dramatically over the past 38 years. In 1970, America's gross domestic product (GDP) represented nearly half the world's output, and U.S. stocks represented two-thirds of the world's equity market capitalization. By 2008, however, U.S. GDP accounted for just 45.03% of world output, and foreign markets accounted for almost 54.97% of the world's equity investment opportunities.1
World Market Capitalization—Stocks
Source: Morgan Stanley Capital International, World Perspective, as of 12/31/70 and 12/31/08.
In fact, many of the world's largest and best-run companies are based on international shores. Looking abroad you'd find:2
- 9 of the world's 10 largest automobile companies
- 8 of the world's 10 largest utilities
- 8 of the world's 10 largest banks
- 8 of the world's 10 largest telecom services companies
The Benefits of Global Diversification
One of the best reasons to consider investing globally is the diversification it can provide. Historically, international markets have experienced different economic cycles than U.S. markets. When the U.S. economy has slowed or gone into recession, other economies at times have continued to grow.
As the graph illustrates below, world economic trends have moved more in tandem in recent years as increased globalization continues. Even so, foreign investments still remain an essential part of a well-diversified portfolio.
Broadening investments in a variety of foreign markets may provide for a smoother ride in the long term and allow for the opportunity to capitalize on the economic growth and widespread prosperity of several emerging markets.
Global Economies Often Diverge
Annual Change in Economic Growth Since 2000
Source: IMF - World Economic Outlook Database, April 2009. Displays gross domestic product adjusted for inflation.
Potential for High Rewards
As overseas economies and companies have thrived, the performance of many international stock markets has been strong.
Even more important than short-term performance, however, is the fact that foreign markets have demonstrated long-term strength. As shown below, for the 25 years ended 12/31/08 performance of the U.S. market has only ranked 15th out of 18. Please keep in mind that past performance does not guarantee future results.
Foreign Markets vs. U.S. Market
Average Annual Total Returns for 25 Years Ending 12/31/08.
Source: Standard & Poor's Micropal, Morgan Stanley Capital International (MSCI). Stock market performances are measured by the MSCI Indexes. Performance figures are historical and include reinvested dividends. Indexes are unmanaged, and one cannot invest directly in an index.
The chart is for illustrative purposes only and does not represent the performance of any Franklin, Templeton, or Mutual Series fund.
Understanding the Risks
Investing in stocks involves risks, no matter where a company is located. International investing involves additional risks not associated with investing in the United States, including currency fluctuations, greater political and economic uncertainty, and lesser liquidity. Emerging markets have additional, heightened risks related to the same factors, in addition to those associated with these markets' smaller size and lesser liquidity. Investments in emerging markets are designed for the aggressive portion of a well-diversified portfolio.
Important Legal Information
Investors should carefully consider a fund’s investment goals, risks, charges and expenses before investing. Download a summary prospectus and/or prospectus, which contains this and other information. Please carefully read a prospectus before you invest or send money.
Footnotes
- Source: Morgan Stanley Capital International, World Perspective, as of 12/31/70 and 12/31/08.
- Source: MSCI Perspective, 12/31/08. Ranked in terms of market capitalization.
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