Your Core Portfolio: International & Emerging Markets

Today, we continue to construct your “core portfolio.” As a reminder, the concept of the core portfolio is to create a diversified list of holdings picked for the long haul.

The international and emerging-market allocation of your core portfolio is set at 15%. That might seem like a lot, but if anything, it might be too little considering that America doesn’t make up 85% of the world’s economy. Besides, at 15%, international and emerging markets are tied for the biggest share of your portfolio:

Asset Allocation Asset Allocation
Large-Cap Growth 15% Options 5%
Large-Cap Value 15% Midcap Growth 4%
International/Emerging Market 15% Midcap Value 4%
Income-Driven 14% Small-Cap Growth 4%
Special Situations 10% Small-Cap Value 4%
Swing Trades 10%

Investing in international stocks requires a lot more than just knowing the stock trends in countries outside the U.S.

The problem is that, in addition to understanding all the basics of stock investing, you also have to understand the particulars of each given country, including currency risk, inflation risk, political risk, volatility risk and a whole host of risks we probably don’t even know about. At least here in the U.S., I know what factors are at play in any given investment.

So when I run into a situation like this, I really don’t have any choice but to rely on so-called “experts,” and hope they are, in fact, experts. Then again, I suppose I don’t have to rely on them. I could just stuff this part of the portfolio with ETFs. But my goal is to outperform indices, so I want to add other investments that will accomplish this. In this case, it means adding a few well-regarded mutual funds to the mix.

I choose those funds in the same manner that I always do: I look for funds that have outperformed their indices over long periods of time, that ideally have a four- or five-star Morningstar rating, and that a few wealth manager friends think highly of. So it’s partially quantitative, but also qualitative.

However, as always, I first anchor the asset class with an ETF. In this case, I like the iShares MSCI EAFE Index Fund (EFA). This ETF holds about 900 securities, which covers some 85% of the free-float-adjusted market capitalization in developed markets outside the U.S. and Canada. The ETF holds 22% of its total position in Japan and another 22% in the U.K. It also holds 9% in France, 9% in Switzerland, 8% in Germany, and the rest of the holdings are scattered among Europe, Hong Kong, Singapore and New Zealand. The sector breakdown provides exposure to all the important sectors — financials, industrials, consumer, health care, etc.

The First Eagle Overseas Fund (SGOVX) is a good addition — a large cap blend fund with a five-star rating, with 17 of the past 19 years finishing in the black. In 2008 — a year when the S&P 500 was down 37% — this fund only lost 20%. In 2003, when the S&P was up 28%, First Eagle was up 40%. It has a reasonable expense ratio of 1.17%, and invests at least 80% in developed markets. Top holdings include Mexico’s Grupo Televisia (TV), Japan’s Keyence (KYCCF), and France’s Total SA (TOT).

What about Brazil, China and African nations? Again, unless you’re an expert in each of those economies, you might want to tilt towards preservation of capital rather than play in a sandbox whose rules you don’t understand. That’s why I recommend mutual funds.

Harding Loevner Emerging Markets (HLEMX) is a bit more pricey, with a 1.49% expense ratio. However, it gives me stable exposure to emerging and frontier markets with at least 80% of its assets invested in those areas, holding 50 to 80 investments in at least 15 countries. It has a four-star rating and has been up 10 of the past 14 years. This is a very volatile fund, but having a dollop of this kind of risk-reward profile is something I’m comfortable with. Its 10-year load adjusted return is 13.78%. The fund’s top holding is South Korean consumer electronics giant Samsung (SSNLF) at 4.3%, but other top picks include Taiwan Semiconductor (TSM) and Panama’s Copa Holdings (CPA).

The two other funds I recommend are Pear Tree Foreign Value (QFVOX) and Lord Abbott Developing Growth (LAGWX). The former is a 5-star fund with a good deal of volatility. It was down 52% in 2005 … but roared back 58% in 2009. It has historically blown away the S&P 500. The latter is also a five-star fund with a 10-year load adjusted return of 11.36%, and often ranks in the top ten funds by category.

As of this writing, Lawrence Meyers was long EFA, SGVOX, HLEMX, QFVOX and LAGWX. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at and follow his tweets @ichabodscranium.

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