Pivoting to international funds

šŸ“ˆ Investing & Markets
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#1

Iā€™ve read a few articles recently talking about how US stocks have outperformed international for several years mow, but historically international has outperformed for stretches of time.

Amana developing world fund has been there for some time, but the high fees and underperformance had me end up avoiding it. Now we have new ETF options like UMMA and SPWO.

I hesitate to shift a large amount into something relatively new or something that has underperformed since inception. I have 10 percent in UMMA for my 401k and maybe 5 pretax.

Has anyone recently shifted to a more significant allocation?

SPWO is newer but lower fees. Iā€™m thinking to shift to that instead of or in addition to UMMA. I donā€™t have anything in it today.

#2

As-Salamu Alaykum,

One way to think about it is that most large US companies are international - i.e. Microsoft, Adobe, etc.

They cater and have subsidies internationally.

Personally, I have international and US funds but in the end, most international funds are US heavy.

Jazakallah Khairan,
Maheen

#3

Salam, Iā€™m aware many of the US large cap stocks are selling their products internationally.

I donā€™t know if this history of international vs domestic stock performance is accounting for this. I imagine that there is more international reach of domestic companies now than used to be in prior decades thanks mostly to tech companies.

#4

Wa Alaykum Salam,

I think this is only a very recent thing that companies can be simultaneously domiciled and international.

I doubt there is enough data to consider the above in the grand scheme of things however a lot of great international funds are US heavy.

It also depends on how ā€œinternationalā€ it is.

Is itā€™s just 80% US and 20% EU

Is it 25% US, 25% EU, 25% Japan, and 25% emerging markets.

Some ways, though off topic, is that you can reach an international reach by looking at thematic funds instead.

Tech funds + biotechnology funds

Instead of

Mixed markets.

Jazakhalla khairan,
Maheen

#5

Salam,

I revisited articles Iā€™d seen about this topic, and as I skimmed through itā€™s clear the majority view is thereā€™s value to have international stocks aside from US large-cap multinationals. Warren Buffet is the only big name Iā€™m aware of that doesnā€™t believe international stocks are worth holding.

There are many large portfolio managers that say international stocks are worth having. Hereā€™s one:

https://www.tiaa.org/public/invest/services/wealth-management/perspectives/why-international-stocks-still-make-sense

Donā€™t I get enough international exposure with large U.S. multinationals?

ā€œWhile U.S. Investors do get some foreign exposure from investing in U.S. multinationals, (generally defined as U.S.-based companies generating at least 25% of revenue outside the U.S.), in the sense that these companies profit from economic growth overseas, U.S. investors should hold non-U.S. stocks, for several reasons,ā€ says Abernethy.

U.S. multi-national companies tend to represent certain parts of global industry and not others. For example, by only owning U.S. multinationals investors will likely end up holding a lot of technology and healthcare firms. However, theyā€™d be underrepresented in other important parts of the global economy, such as basic materials.

In addition, most U.S. multinationals fall in the Large Cap category, those companies with $10B or more in market capitalization. Our research has shown that the benefits of international diversification are greatest when investing in smaller companies, and that international small stocks helped to diversify equity portfolios of U.S. investors more than large stocks. U.S. multinationals provide little exposure to international equity from an investment return standpoint, even when a high percentage of revenue comes from foreign sales.

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There are many others promoting having some exposure to non-US-based companies, e.g.:

https://www.hartfordfunds.com/insights/market-perspectives/equity/a-whole-new-world-why-international-stocks-may-finally-shine.html

https://www.fidelity.com/learning-center/wealth-management-insights/international-stocks

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Whatā€™s unclear to me is whether the Islamic ETFs and mutual fund options capture enough of the diversification benefits or not. One of the above articles mentioned it was the smaller-cap international stocks that gave more benefit (less correlation with US stocks), and it doesnā€™t seem those are included in the funds that exist:

https://www.jhinvestments.com/fund-compare?compare=AMIDX,UMMA,SPWO

I like that SPWO has more funds and lower avg market cap than UMMA (from above, 325 vs 98 and 84 vs 125B), but it is pretty new so is missing the track record.

Amana developing world funds has only 42 stocks with avg market cap of $31B (per earlier article, lower is better). I suppose they could get lucky with their picks over the next decate but seems riskier as an actively managed fund, though the same fund managers (Scott Klimo and Monem Salam) have done a good job so far at that with the Amana growth fund that only has 36 holdings.

In any case, itā€™s good to keep an eye out on their performance. The above website lets you see comparative growth of 10K with gains included over time.