Morningstar Advisor - Fall 2007 - 32

Spotlight: International outside U.S. borders. When Tweedy, Browne first ventured overseas years ago, it was because some European pharmaceuticals companies and consumer-staples firms were trading at ample discounts to their U.S. counterparts, even though they offered similar growth characteristics. More recently, portfolio managers have pointed out comparatively cheap stocks in Japan, Korea, and other parts of Asia. And then there’s growth. It’s been years since the U.S. economy sustained a real GDP growth rate much higher than 3%, and it’s unlikely it will again considering its post-industrial makeup and the Federal Reserve’s attitudes toward inflation. The same holds true for other developed economies, such as the United Kingdom’s and most of those that make up EMU. But there is still growth opportunity in the world. The most talked about, of course, is China’s. Plenty of stocks around the world are benefiting from the country’s infrastructure spending and need for natural resources. Growth in other countries, such as Poland, India, Spain, and Ireland, have also outpaced the United States’. The third—and our favorite—reason why investing in foreign stocks is important today is that’s where you’ll find some great investors who don’t manage U.S.-focused portfolios. The fluid state of global opportunities calls for managers who are smart and flexible. As we do when we recommend U.S. funds and portfolio managers, we like international managers with sensible strategies, adequate resources, and strong long-term performance records. Several managers fit the bill, including Rudolph Raid-Younes and Richard Pell of Julius Baer International Equity BJBIX, Mark Yockey of Artisan’s international funds, and Hakan Castegren of Harbor International HAINX. We’re also enamored with Oppenheimer’s international group. Another favorite, Causeway, offers just two funds—one a broad international fund, the other an emergingmarkets choice. Words of Caution Over the past several years, overseas markets have generally outdone U.S. markets—in part because of the weakening dollar. Over any period, that will happen; over other periods, the reverse will be true. What’s particularly notable at this juncture, however, is just how big returns have been in absolute terms. Consider the MSCI EAFE Index is up an annualized 19.61% over the past five years and the MSCI Emerging Markets Index has gained 29.50%. That said, it’s clear that international investments deserve a significant place in long-term investors’ portfolios. Think about such vehicles the same way as you would domestic ones. International stocks should help diversify your clients’ portfolios, but there are more-compelling reasons to go overseas. K Bridget B. Hughes, CFA, is a senior mutual fund analyst with Morningstar. Senior mutual-fund analyst Michael Breen and fund analyst Christopher Davis contributed to this article. Jonathan Schrader, Senior Analyst TORONTO This huge landmass with a relatively small population has produced many of our favorite comedians (Mike Myers, Dan Aykroyd, and Jim Carrey), the best point guard in basketball (Steve Nash,) and two of the biggest draws in Vegas (Cirque du Soleil and Celine Dion). There is one more thing Canada has produced that Americans should know about: Outstanding investment returns. Business is booming in Canada, thanks to a global bull market in natural resources that has supercharged growth in the resource-rich West and has made most Canadians wealthier than they’ve ever been. Naturalresources companies—mining and energy in particular—represent a big chunk of Canada’s equity market and have generally performed very well in the past five years, leading the Canadian equity market higher. Through the end of September, the S&P/TSX Composite Index had returned 20.4% annually in the previous five years, well above the 15.5% annualized return for the U.S. benchmark S&P 500 Index. Many of the approximately 50 Canadian resources companies we cover have operations around the globe. These companies, such as Talisman Energy TLM, EnCana ECA, Barrick Gold ABX, and Canadian Natural Resources CNQ, use the expertise developed in Canada to pump oil from the North Sea, extract natural gas in Southeast Asia, mine diamonds in western Africa, and find precious metals in Mongolia. These firms then sell their products in U.S. dollars to customers in China, India, and the United States, among others, proving that, like most sectors, natural resources is a truly global business that should be analyzed from a global perspective. We think the future for these firms and their Canadian peers is bright, and we expect solid returns from the Canadian market in the years to come. Dispatch From: Resources Firms Strike It Rich 32 Morningstar Advisor Fall 2007

Morningstar Advisor - Fall 2007

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