The Whole World in Your Portfolio By Noel Lamb, Russell Investments Uncertainty about the U.S. economy's effect on overseas markets is leading some investors to eliminate or reduce their overseas holdings. While a tactical reallocation may be in order, foreign equities remain a portfolio diversifier and potential source of additional growth; and they still should be considered a sound strategic investment. Until recently, domestic investors have held a strong "home-country bias," that is, a tendency to overweight portfolios with U.S. stocks. However given strong performance overseas the past few years, particularly in the BRIC countries — Brazil, Russia, India and China — bolder investors have looked beyond U.S. borders to invest in international, emerging markets or even truly global equities. Going "global" doesn't mean adding a few non-U.S. stocks to your portfolio or investing in a couple large U.S. multinationals. Specifically, global equity investing means searching investable securities throughout the world and picking those capable of outperforming a global index. Seeking top global performers For example, with the freedom to select any stock in the world, global equity managers have the ability to seek out top performers with well-known brands such as Coca-Cola Co., Google, McDonald's, Microsoft and Nestle. Managers also are turning to emerging markets, where companies such as Hyundai and Samsung, both in South Korea, have performed well. The phenomenal growth of emerging market countries is making them players in the global economy, both as producers and consumers. The global economy expanded vigorously during the first half of 2007, with growth exceeding 5 percent. By comparison, China's economy expanded 11.5 percent, and the future still looks bright. Year-over-year GDP growth forecasts for emerging markets are expected to exceed 7 percent for 2008. As a result of this growth, market watchers expect higher corporate earnings growth in emerging markets than in the United States. Individual stocks in BRIC markets have done quite well. A study by Russell Indexes revealed that of the top-100 performing global securities in 2007, based on total return, 41 are in India, and 48 are in BRIC countries. Only six are U.S.-based firms. Emerging markets are not without risk. Subject to powerful geo-political and social pressures, and often lacking infrastructure to deal with inevitable natural disasters, securities in emerging markets have a history of volatility. Yet, for long-term investors, the projected strong performance of emerging markets can make them a powerful portfolio diversifier and potential source of growth. As well, the Federal Reserve Board's recent rate cuts could further weaken the U.S. dollar, which will help boost returns for U.S. investors from foreign stocks. Past history is not a predictor of future results, but it's helpful to look at the trend. Russell Indexes data as of Dec. 31, 2007 shows annualized performance in the 37-country emerging market segment for one year, three years and five years of 41.7 percent, 36.6 percent and 35.7 percent, respectively. Compare that to the total U.S. return measured by the broad-market Russell 3000® Index of 5.1 percent, 8.9 percent and 13.4 percent over the same one, three and five years. While the super-strong performance of emerging markets isn't sustainable, the positive economic and corporate earnings projections for these countries are signals this asset class may outperform their developed market counterparts in 2008. Selecting a strategic allocation But which global or emerging market stocks or mutual funds represent the best investment opportunity? Research by Russell Investments shows that global managers who take substantial country and sector bets — typically as a result of bottom-up stock picks — generally have added greater value. However, while picking the right fund manager is key, many individual investors have neither the time nor expertise to study the array of mutual fund managers, analyze them, then pick the right one for their unique portfolio. That's why I advocate first finding a financial advisor whom you like and can trust. Work with that individual to set financial goals and strategies. That said, one hopes your advisor recommends a strategic allocation to international, and within that allotment, makes a case to invest in global equities and emerging markets. Exactly 50 years ago, America rocked to the top-selling song, "The Whole World in Your Hands." While it may not be possible to have the whole world in your hands, you should at least consider a portion of it for your portfolio. Noel Lamb is Chief Investment Officer, North America, for the Tacoma, Wash. -based Russell Investment Group. This article is part of a series of monthly columns by Russell associates. CORP 5416			RELATED Articles Saving for Retirement The High Cost of Borrowing from Your Retirement   Printer friendly version of this page Send feedback or comments Site Search

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