Bring It On Home
In the past few years, investors with significant foreign exposure outperformed those who relied solely on U.S. equities. There were two reasons for this. First, foreign stocks held up much better during the credit crisis of 2008. U.S. stocks plummeted following the collapse of Lehman Brothers, the GM bankruptcy, and the government rescue of AIG. Foreign stocks suffered, too, but not nearly to the same extent.
Secondly, throughout it all, the euro has remained remarkably strong relative to the dollar. This favorable exchange rate helped to further boost foreign returns when repatriated back into dollars. Essentially a 10% gain on investments on the Continent translated into a 14% gain in dollars. As a result, those willing to invest overseas only had to pick good stocks to receive great returns.
Now, few question the seriousness of the European sovereign credit crisis. With major countries teetering on the edge of default and severe austerity programs proposed as part of the solution, economies are certain to be under strain. To believe in Europe in 2012 is to believe the EU’s credit crisis can quickly be put aside without slowing economic growth. This is virtually impossible given the depth of the problems and the amount of capital that must be allocated to their resolution. Austerity measures will also take their toll on individual as well as government spending, weighing on overall growth. In this case, the consensus would appear to be quite well founded in foreseeing an economic slowdown overseas.
If this is correct, investors should retrain their focus on the U.S. Rather than looking for Coca-Colas or Caterpillars which generate the majority of their revenues abroad, they should consider utilities and regional banks that are domestically focused. Rather than seeking equity mutual funds with heavy multi-national weightings, they should be seeking those with centered in the U.S. Now, more than ever, it’s critical to review and understand the funds’ portfolios and their foreign exposure.
Also this is not the time to put excessive weight on one or even three-year performance. Stocks and funds that were top performers in the past few years because they depended on foreign exposure are precisely the ones investors should avoid now that the balance appears to be swinging back in favor of domestic stocks. If this thesis is correct, this is definitely a situation where past performance is clearly not indicative of future returns.
Explore posts in the same categories: Current Environment, Mutual Fund Evaluation, Portfolio ConstructionTags: Current Events, fund evaluation, mutual funds
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