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Jun 23, 2002 3:06 pm		re: re: Global Investing - Pros & Cons
Guan Seng Khoo		Yup, diversification is bunk but only if it's passive diversification. If it's dynamic, it helps. Best, > Adrian Scott wrote: > ok, one question is, who believes in portfolio theory? > >the other important thing is that people realize we are all exposed to foreign exchange risk and >are investing in currencies whether we realize it or not! :) > >i think diversification is bunk as a risk mgmt strategy. :) > >-a > >ps (ishares are cool) > >> Guan Seng Khoo wrote: >> Global Investing (extracted from PremierInvestor.com) >> >>The decision to invest in foreign markets depends on many personal factors. Portfolio size, investment horizon, and financial goals can all play an important role in the decision to invest globally. In many cases, unfamiliarity with foreign market investment vehicles tends to dissuade investors from actively pursuing international diversification. However, there are many easy ways to invest in foreign markets for the average investor. We will talk about these products as well as the benefits and risks associated with international equity investing. >> >>The primary argument in favor of global equity investing is diversification. Diversification across the world's equity markets can produce a portfolio with more appealing risk/return characteristics. Portfolio theory tells us that two assets that are not perfectly positively correlated will reduce the risk in a portfolio of assets, as measured by the variance of returns. The incentive to invest globally is analogous to diversifying a domestic stock portfolio across different geographic regions to reduce exposure to one particular economic locality. >> >>However, the benefits of global diversification are not cut and dry. Some studies find that during adverse market events such as crash, currency crisis, and war, the correlation between global markets actually increases. So just when you needed it most, the portfolio diversification benefits are falling as the correlation among the world markets increase. >> >>Another argument against lower global market correlation is the increasing interdependence of the world's economies. No longer is Japan or Europe isolated from a U.S. economic slowdown. As communications and technology tie our economies closer together, the argument for diversification among the world's equity markets doesn't hold as much water. >> >>While you can probably find a study that refutes almost every accepted investment principle there is, the currently accepted investment tenet holds that there is some benefit to international equity diversification. With that having been said, let's discuss some potential risks to foreign market investing and then go over some investment strategies that can be used in international investing. >> >>Risks >> >>An investor faces a whole host of new risks when considering foreign markets for a potential equity investment. The most obvious risk is currency risk. Even though a portfolio of international assets might outperform an equivalent domestic portfolio, any currency movements could actually result in the international assets underperforming the domestic portfolio. Hedges can be implemented but they are costly and can cut into potential returns. >> >>Another risk the individual investor faces is different international accounting standards. Different countries might have different asset valuation standards and revenue recognition principles. For this reason, investors should not attempt to us ratio analysis to evaluate international stocks. Since the ratios can't be compared across borders, this valuation technique could result in severely impaired investment decisions. Instead, investors should focus on identifying relevant cash flows and applying them to a discounted equity valuation model. >> >>An additional hurdle to international investing is potentially different tax treatment. Investors should consider any additional tax burdens from investing and taking profits in foreign countries. >> >>International investors also face operational risk. Foreign exchanges have different clearing procedures and in some cases can limit or forbid the repatriation of foreign capital, as was the case recently in Malaysia. >> >>Investment Strategies >> >>An investor pursuing international exposure should decide initially whether or not to employ the services of a professional money manager. International investing is prone to many hazards and pitfalls and takes a lot of time and effort. If the decision to use a professional money manager is made, the investor must decide on the type of investment philosophy before deciding on a specific money manager. Money managers either pursue active or passive investment strategies. An active manager makes decisions concerning market allocation, security selection, and currency bets in an attempt to increase return. Passive investment managers attempt to mimic the performance of an international or country specific index. The main issue a passive manager faces is minimizing tracking error between the their portfolio and the actual index. >> >>Additional strategic alternatives need to be decided such as the decision to hedge and which markets should be weighted the heaviest. These long-term decisions should be made prior to investing. Also, the extent to which tactical adjustments are made in the international portfolio should be discussed in advance, so that manager and investor share the same philosophy. >> >>Many economies around the world are growing at incredible rates. These developing countries can offer excellent investment potential if the investors educate themselves about the risks and rewards of international equity investing. >> >>Investment Vehicles >> >>There are many vehicles available for investors wishing to pursue international diversification. International mutual funds offer instant firm-specific diversification due to the large number of stocks in their portfolios. Further, their focus can be market specific, such as Japan funds, or regional (Far East fund) or global in perspective. Finally the investor receives professional management for 1-2% of assets. >> >>Another option available to investors is specialized products offered by financial firms or exchanges, e.g., Barclay's Global Investors has developed a new exchange traded product called iShares. These securities are index funds that can be actively traded like stocks. These products offer an easy way to invest in many of the world's larger markets. For more information, investors should visit www.ishares.com. >> >> > > Private Reply to Guan Seng Khoo (new win)

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