Quadrix Drives Our Focus On U.S.
Two decades ago, a company’s statement that it was expanding overseas generally conjured up two words in the mind of investors — “growth” and “risk.”
The risk is still there, but these days we must look farther afield to find that growth.
While the world economy continues to grow, the high-income, developed countries are not pulling their weight. The World Bank estimates the world economy will grow 3.3% this year and next year, with high-income countries delivering growth of no more than 2.4% and developing countries expanding at a rate of at least 6%. For more on where to find the growth, check out the story below.
The Forecasts covers very few foreign companies on our Monitored List, partly because of our reliance on our Quadrix® stock-rating system. Of the more than 4,300 stocks that earn Quadrix scores, only 504 base their operations outside the U.S., and nearly 36% of those are Canadian. We do not count U.S.-based companies headquartered in offshore tax havens as foreign.
In general, we prefer to use funds for our international exposure. Still, the nearby table presents 17 large-cap foreign stocks with Quadrix Overall scores above 90. These stocks may have appeal for risk-tolerant investors, but the Forecasts recommends only two of them, Research In Motion ($55; RIMM) and Rogers Communications ($37; RCI). Research in Motion is reviewed in Stock Screen. For more on Rogers, read on.
The biggest wireless carrier in Canada, Rogers Communications is one of three companies that control 95% of the country’s mobile market. Operating in the eastern half of the country, Rogers also holds a 30% slice of Canada’s cable-TV market. The stock has risen 9% since the beginning of April, yet its valuation still ranks in the top 20% of stocks in our research universe.
In the September quarter, Rogers increased its profits by 1% to C$0.83 per share excluding special items. Revenue advanced 3% to C$3.12 billion. In U.S. dollars, both sales and profits fell slightly short of the consensus, and the shares dipped on the news. But the consensus projects per-share-profit growth of 18% this year and 10% next year, and Rogers appears reasonably valued at 11 times the 2011 estimate. Rogers is a Focus List Buy and a Long-Term Buy.
For investors who wish to gain more foreign exposure than they can get with one or two individual stocks, the mutual funds reviewed below have appeal.
Vanguard Total International Stock Index ($16; VGTSX) tracks both the MSCI Europe, Australasia, Far East (EAFE) Index, which focuses on developed markets outside of the U.S. and Canada, and the MSCI Emerging Markets Index. The fund contains about 1,700 stocks and is 74% invested in developed markets.
Vanguard International Value ($32; VTRIX) focuses on large-capitalization value stocks, with 78% of assets in developed markets. The fund’s 0.45% expense ratio is well below the average of 1.43% for foreign large-cap value funds. About 24% of Vanguard International Value’s assets are invested in financial stocks. The fund’s dividend varies greatly from year to year, but the 2009 distribution equates to a 2.3% yield at current prices.
T. Rowe Price International Discovery ($42; PRIDX) prefers small or midsized growth stocks but sticks mostly to developed markets. T. Rowe Price International Discovery has an Eastern focus, with about 48% of assets invested in Europe and another 43% in Asia, but only 21% of assets are invested in emerging markets.
The superior economic growth of emerging markets has translated into strong stock returns. Since April 2003, the iShares MSCI Emerging Markets Index ($46; EEM) fund has risen 297%, versus 72% for the iShares MSCI Europe, Australasia, Far East (EAFE) Index ($51; EFA) fund. The EAFE Index focuses on developed markets outside the U.S. and Canada.
Not surprisingly, the robust returns of emerging markets come at the cost of greater volatility. The iShares Emerging Markets Index fund’s monthly standard deviation (a measure of how far monthly returns vary from the average) is 7.4%, versus 5.6% for the iShares MSCI EAFE Index fund.
Despite that risk, investing in emerging markets makes sense for many investors.
First, the long-term performance advantage of emerging markets is difficult to ignore. Positioning 5% or 10% of portfolios in emerging markets could meaningfully boost returns.
Second, emerging-market equities do not always move in synch with U.S. stocks. As such, despite their higher volatility, they may actually reduce the risk of a broader portfolio if added in small amounts.
That combination of excess return and diversification benefits should appeal to all but the most conservative. However, individual stocks from emerging markets carry too much risk for many individuals. They can also be expensive to purchase if the shares do not trade on U.S. exchanges. In addition, information on emerging-market companies can be both untimely and difficult to obtain. The Forecasts recommends that investors seeking exposure to emerging markets purchase the Vanguard Emerging Markets Stock Index ($30; VEIEX) fund.
The fund has returned more than 15% so far this year, nearly triple the return of the iShares MSCI EAFE Index, and managed an annual return of 14.8% over the last 10 years, versus 3.4% for the index. About 59% of the fund’s assets are in Asian stocks, with nothing in Japan or Australia.
The fund has nearly 8% in stocks from Africa or the Middle East and 10% in Europe (none in the U.K. or other developed nations). Most of the remaining 23% of assets are invested in Latin America. Our recommended Growth Portfolio has a 5% weighting in Vanguard Emerging Markets Stock Index.