Extreme Global Investing
Cindy Lewis is a 52-year-old divorced suburban mother of two who drives a Ford minivan and is active in the PTA. An extremist? That's not exactly the word that comes to mind. But in her investing habits, she's extreme all right.
Lewis has a $3 million portfolio, and every penny is invested in foreign stocks and bonds. There's nary a Cisco (CSCO ), Dell (DELL ), Intel (INTC ), Citicorp (C ), or Wal-Mart (WMT ) in the mix. Just things like Kiwi Income Property Trust, a New Zealand real estate investment trust, and the Aberdeen Asia-Pacific Income Fund (FAX ). Different stocks in her portfolio are up 50%, 100%, even 400% in the past five years. Yes, you read that right -- 400%. Oh, and by the way: Lewis's portfolio yielded almost $300,000 in income last year. (Overall, it's up 200% in five years.) "I have nothing against America, but there is no value in the market here," the Thousand Oaks (Calif.) resident says.
Investment advisers and finance professors have long urged Americans to be more global, putting as much as half their stock allocation where half the world's public companies are located: outside the U.S. The idea is to profit from economic growth in other nations and to diversify portfolios. So far this year, investments in foreign stock mutual funds have outpaced U.S. funds almost $4 to $1, according to the Investment Company Institute, the fund industry's trade group. Of the $8.9 trillion in mutual fund assets last year, nearly 11% was stashed in foreign securities, up from 8% in 1995.
But Lewis and others like James Pope, managing director of Sentinel Real Estate Corp. in New York, have clearly gone to extremes. Pope has put 100% of his six-figure 401(k) account in a foreign stock fund, American Funds EuroPacific Growth, prompting his plan administrator to send him warnings that he's not diversified enough. The fund is up an annualized 24% in the past three years, against an 11% gain for the Standard & Poor's (MHP ) 500-stock index. "It's hard to argue with those numbers," says Pope, whose firm invests in real estate.
What's turbocharging the returns for these folks: the persistent weakness of the U.S. dollar against a multitude of currencies. In the last five years the dollar has fallen 31% against the euro, 26% against the Canadian dollar, and 8% against the Japanese yen. That means stocks denominated in other currencies are worth more dollars, even if the price in euros or yen stays the same.
In fact, if you're practicing this sort of extreme investing, you're making a bet on one of two scenarios. Either you're a nimble enough investor to know when the dollar will strengthen, and will hedge or get out ahead of the turn, or you believe the dollar is in a permanent long-term decline, the result of America's seemingly intractable budget and current-account deficits. Peter Schiff, president of Euro Pacific Capital, a New York brokerage firm that specializes in nondollar investments for individual investors, falls into the latter category. "We are not sending money abroad because we are looking for risk," Schiff says. "The risk is here in America. It's in the dollar. We're simply consuming too much and not saving enough to pay for it."
NO DICE ROLL
While it's easy to be down on the dollar, is it wise to pass on the U.S.? "If you are investing for the very long term, it would be inconceivable that you would put a 0% weighting on the U.S.," says Campbell Harvey, professor of international business at Duke University's Fuqua School of Business. "The U.S. is a very dynamic economy, it has done extremely well. [Bypassing it totally] would be ill-advised."
Yet Lewis, and investors like Dale and Lucy Swearingen from Chagrin Falls, Ohio, say they are not rolling dice but in fact choosing relatively conservative investments. "We are investing in companies that are solid and in most cases pay a dividend, " says Lucy Swearingen. The couple -- he's an architect, she's a nurse -- had virtually no money overseas 10 years ago. Today they have more than 90% of their portfolio in foreign securities, including desalinization plants in Singapore and toll roads in China.
One of Lewis' largest investments is Kiwi Income Property Trust, which has a 6.6% yield. She also holds shares in Harvest Energy Trust, a Canadian owner of oil and gas properties. Other holdings include Santos, an Australian oil and natural gas exploration firm, and various international gold mining concerns.
Lewis and the Swearingens are not out there picking foreign companies alone. They're being guided by Euro Pacific Capital (no relation to American Funds EuroPacific Growth). Though Euro Pacific's president Schiff is a regular CNBC pundit on international investing, both say they came to Euro Pacific via investment newsletters. Schiff, for one, prefers investing directly in stocks on their home exchanges rather than using American depositary receipts, which trade in U.S. dollars, mainly on the New York Stock Exchange (NYX ). That's because you can invest in fewer than 1,500 companies through ADRs, and they tend to be large and well-known. The real gems, says Schiff, are in the smaller companies that might trade anywhere from the Netherlands to New Zealand.
Placing an order to buy or sell stocks in Amsterdam or Auckland is far more expensive than trading ADRs, which trade like U.S. stocks with U.S. commissions. Charles Schwab (SCH ), for example, charges as much as $100 per foreign trade vs. a maximum of $12.95 for an online domestic trade. That's not a huge cost for investors who plan to hold those stocks for a long time. But frequent trading in foreign securities could get costly -- even if you are earning extreme returns.
By Lauren Young, with Greg Hafkin