Global Funds: the Lazy Man's Portfolio?

These funds stamp out home-country bias.


During a powwow of investing heavyweights earlier this month—the Investment Company Institute's general meeting—a panel of mutual-fund bigwigs was asked this question: What is the No. 1 innovation for mutual-fund investors over the past 50 years? Two of the four panelists said global funds.

Beginning investors are often told that they should pick a U.S. stock fund and then a separate international stock fund for some overseas exposure. Recommended international allocations are all over the board (I've heard everything from zero to 50 percent, though most financial pros say somewhere in the neighborhood of 25 percent.)

Global funds are a way to get U.S. and international exposure in one package. Instead of being tied to one region, these flexible funds scour the globe for the best opportunities. They also put the decision of how much to invest outside of the United States in the hands of a professional. Says Keith Walter, comanager of the Julius Baer Global Equity fund: "U.S. investors should try to avoid having too much of a home-country bias in their portfolio allocations. Given that the United States represents less than 40 percent of the world's equity markets, a portfolio that is tilted, say, 90 percent to the U.S. equity market is really not invested globally."

For small investors looking to go global, Vanguard is planning a global stock exchange-traded fund thatwill track the FTSE All-World Index of 2,800 large and midsize companies in 48 countries. The fund, set to launch in late June, will include a 55 percent weighting outside the United States and will charge 0.25 percent in annual fees. (There's already plenty of buzz about it on the Bogleheads forum.)

For small investors, "global funds are a good catchall," says Steven Dimitriou, managing partner of Mayflower Advisors, an investment advisory firm in Boston. He adds that his firm avoids global funds because Mayflower focuses on specific styles, but "for individuals looking to avoid transaction costs, instead of paying for a domestic and an international fund, you can cover them both with global."

The biggest knock against global funds is that they make it difficult to control your exposure to foreign stocks (and, if you hold other domestic funds, throw your U.S. allocation out of whack as well). But it's worth noting that the overlap issue isn't confined to global funds—plenty of U.S. fund managers are shopping overseas these days.

So, is it an either-or choice between an international fund and a global fund? I put the question to Keith Walter of the Julius Baer Global Equity fund. He says:

In order to truly embrace the concept of investing globally, you need to invest in a global fund. An investor with both a U.S. fund and an international fund might end up owning General Motors, Ford, BMW, and Toyota when both funds are looked at together. Whereas, in a global fund the manager can compare and contrast the global automobile industry to make sure that only the best investment opportunities are purchased. In this way, the investor ends up with a much larger weighting in Toyota and BMW, while they may have no exposure to either General Motors or Ford.