Diversification: How to Get Broad Exposure Overseas

by Albert J. Fredman

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Mutual funds that invest in foreign equities have disappointed U.S. investors for years. Since the early 1990s, the strong dollar has been a major drag on foreign returns.

The United States established itself as the world’s premier equity market during the past decade and I expect it will maintain that status. Nevertheless, in my October 2001 AAII Journal column (“International Investing: It Still Makes Sense to Diversify,” available at www.aaii.com) I explained why moderate foreign equity exposure is an important dimension of a well-diversified portfolio. Essentially, it insures against a decline in the U.S. dollar and may protect against an extended period of poor domestic equity performance.

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Meanwhile, overseas markets have become better places to invest, as foreign economies continue to move more toward a U.S.-style model. Companies are being privatized, costs are being cut, and financial reporting is becoming more transparent. In addition, the recently expanded coverage provided by the Morgan Stanley Capital International (MSCI) EAFE (Europe, Australasia, Far East) index is good news for index fund investors.

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