International Investing – Welcome to the Jungle
The fun never stops. Like last year, the international stock markets continue providing plenty of excitement in 2012. Up one month; down the next. It takes nerves of steel to handle such fluctuations.
Needless to say, our clients keep asking, “Why invest in companies outside the U.S.?” Fair question. Especially given international stock funds underperformed U.S. stock funds by more than 14 percent in 2011 and another 6 percent so far this year. Why would anyone willingly submit themselves to this?
It sounds crazy, but there’s a method to this madness. Most people don’t realize how globally integrated the world markets are these days (Thomas Friedman’s ubiquitous term, “the world is flat,” comes to mind). They also don’t see how neglecting international investments would cause them to miss out on some really great companies.
If you eat chocolate, purchase groceries, drive a car, watch TV, buy gas or use a computer, you’ve probably done business with a foreign company. Just look at some of the top holdings in the Redwood international stock portfolio:
• Nestle (Swiss) – who doesn’t like Nesquik or Haagen-Dazs?
• Toyota (Japan) – one of the world’s largest car manufacturers
• Philips (Dutch) – one of the largest consumer electronics manufacturers
• Samsung (South Korea) – another large consumer electronics and cell phone manufacturer
• BP (England) – a large global oil company
• Telefonica (Spain) – one of the world’s largest telecommunications companies, with 72 percent of its business outside Spain
• Toronto Dominion Bank (Canada) – one of the few international banks that can still boast a AAA credit rating
• China Mobile (China) – the world’s largest mobile phone company with 655 million subscribers
So, despite the risk and uncertainty, we feel it’s essential to have these companies in your stock portfolio and we continue to stand by investing at least 40 percent of the Redwood stock portfolio in companies that reside outside the U.S.
This issue gets even more interesting once you delve a little deeper into these companies, especially after the correction in international markets over the past two years. The crisis in Europe and the slowdown in China (if you call 7.6 percent GDP growth a slowdown) has caused investors to seek safety in the U.S. from Europe as well as Asia. That’s part of the reason we’re seeing U.S. Treasury bond interest rates drop so low.
What’s more engaging, some great companies, like the ones above, are selling at significant discounts to U.S. businesses. In fact, European stocks are at their lowest valuations (relative to U.S. stocks) in 40 years!
For instance, ExxonMobil is trading at 11 times its earnings per share (the higher the number, the more expensive the company stock) and has a dividend yield of 2.7 percent. While its French counterpart, Total, trades at 6.6 times its earnings per share and offers a 6.7 percent dividend. Nothing has changed in Total’s business relative to Exxon. It’s just that everyone is fleeing European stocks right now because of the current crisis. It’s one of those rare opportunities to buy an investment for really cheap. Therefore, despite what CNBC or a stockbroker at one of those large Wall Street firms is telling you, you need to continue investing in these markets.
With that said, however, we still are well diversified. We hold more than 6,000 international companies spanning 40 countries in the Redwood International stock portfolio. In a typical client portfolio with 70 percent in stocks and 30 percent in bonds, we have 22 percent invested in international companies with around eight percent in Europe and eight percent in Asia. As a side note, the countries making headlines these days, such as Greece, Portugal, Italy, Ireland, and Spain, represent less than one percent of our entire portfolio.
In other words, we will continue to invest in international stocks. However, as Keynes said, “the market can stay irrational longer than the investor can stay solvent,” so please be patient. It may take time for these markets to become more rational, but as we always like to remind you, we prefer to look forward and focus on the next five years, not this year or next. We also believe international stocks will provide a good return over the next five years and beyond.
In the meantime, focus on sticking to your financial plan and trust your advisor to systematically rebalance your portfolio. This will force you to buy more of these investments while they’re down and sell the ones that have been up.
Lane Steinberger MBA, CFA, CFP®
Partner, Chief Investment Officer