Friday, November 30, 2007

Check Out Your Mutual Fund Holdings

What's in Your Global Equity Fund?
Most global equity funds invest in major industrialized economies around the world. They also have sprinkles of exposure to advanced emerging markets like Brazil, China and Russia.
For the most part, these funds invest according to benchmarks. About half of their assets are in the United States. The rest are spread out across Western Europe and parts of the Far East including Japan, Hong Kong and Australia.
But increasingly, more fund managers are straying from investing in advanced economies to invest in red hot emerging market stocks. The result is greater returns, but additional risks. Most global fund investors don't understand these risks. Or worse, they have no idea their global funds are invested in such risky assets in the first place.
For example, some funds coined "Global Equity Funds" have soared over 30% this year. The benchmark, the MSCI World Index, has only risen 8% in dollars. Obviously, something is wrong with this picture. To their amazement, investors might find their mutual funds stuffed with high-risk stocks like China Mobile, China Life, or Brazil's CVRD.
The Global Equity sector in the United States and offshore is home to the single largest category of traditional mutual fund assets. That's because with one investment, an investor can gain instant global diversification across hundreds of stocks in foreign currency-denominated markets.
Investing in these funds takes the guess work out of global investing. You don't have to time the next big foreign market or sector. Also, the lower portfolio turnover means higher net returns because you're not busy trading all the time. That's the good news.
The problem facing investors ahead of the next bear market is "how much" emerging markets exposure do they really have? People forget that emerging markets investing is a two-way street. Yes, the returns have been truly spectacular this decade. But in the past, when financial "bubbles" burst, investors lost a pile of money in a very short period of time.
If you own global equity funds, make sure you don't have more than 10% in emerging markets, preferably even less. Although the major market economies have inherited all the risk this year, the emerging markets are not immune to a recession in the West. Buyer beware.

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