All major mutual fund companies now offer a variety of internationally diversifi
ID: 2703118 • Letter: A
Question
All major mutual fund companies now offer a variety of internationally diversified mutual funds. The degree of international composition across funds. The degree of international composition across funds, however, differs significantly. Use the Web sites listed, and others of interest, to answer the following:
a) Distinguish between international funds, global funds, worldwide funds, and oversea funds
b) Determine how international funds have been performing, in the U.S. dollar terms, relative to mutual funds offering purely domestic portfolios
Fidelity www.fidelity.com/funds/
T.Rowe Price www.troweprice.com/
Merrill Lynch www.ml.com/
Scudder www.scudder.com/
Kemper www.kempercorporation.com/
Explanation / Answer
global funds consist of securities in all parts of the world, including the country in which you reside. Think of a globe, which displays every single country. Global funds are chosen primarily by investors who wish to diversify against country-specific riskwithout excluding their own country. Such investors may already have a lower than desired concentration of domestic investments or may not want to take on the high level of sovereign risk involved in making foreign investments.
International funds consist of securities from all countries except the investor's home country. These funds provide diversification outside of the investor's domestic investments. If an investor currently holds a portfolio consisting mainly of domestic investments, he or she may choose to diversify against country-specific risk and purchase an international fund. Alternatively, a speculator may invest in an international fund because he or she anticipates a rise in a particular foreign market.
The World Wide Fund (WWF) is an international non-governmental organization working on issues regarding the conservation, research and restoration of the environment, formerly named the World Wildlife Fund, which remains its official name in Canada and the United States.
An overseas fund is like a domestic mutual fund. It's usually located in a tax haven jurisdiction and offers a high rate of return both for the fund purchasers and the fund managers.
Those who set up overseas funds benefit because there are no limits, other than natural competition, set on the fees that management companies charge to manage the fund. Also, since the management is physically located in the tax haven jurisdiction it may be able to postpone or eliminate taxes on its management profits.
b.By diversifying across nations whose market cycles were not perfectly correl-
ated, investors could lower the volatility of portfolio returns at any level of expected
return. The research methodology was to derive efficient portfolios using historical data on international stock markets. The efficient frontiers were shown to dominate
those constructed with domestic securities only.
The efficient frontier methodology in the early international diversification
research employed return parameters on a home-currency basis. That is, home-
currency returns included not only the performance of international investments in
their local markets, but also the appreciation/depreciation of home currency versus
foreign currency. Thus while international diversification will appear beneficial if
local market returns are high and less than perfectly correlated with home market
returns, performance will also be enhanced if the foreign currencies appreciate
relative to the home currency, during the data time period.