Why Invest in a Foreign Stock Fund

The attraction of owning a foreign stock fund lies with the two key components that investors seek.

1. Great returns: For example in 1999 the average foreign stock fund gave happy investors a return of around 44% compared to the S&P 500 which gave returns around 22%. 

2. Diversification: Diversifying your investment allotments into foreign funds means you increase the chances of having a good performer even if the domestic markets are in a sulk. (Morningstar)

The wise investor looks at foreign stock funds as another stream of income. There are possibilities of soaring returns but also risks of precipitous drops in the return percentages. John J. Ray, writing for Forbes.com notes that mutual funds are a good way to add what he calls “a little foreign spice” to your investment portfolio. (Ray, John, J., 2005, Forbes.com)
Foreign funds can be volatile due to any number of factors not affected by, and not controlled by U.S. investment laws. It pays to have a complete knowledge of your foreign fund manager’s strategy and style. Two key issues to investigate are: 

1. How often does the manager of your targeted fund invest in the emerging market sectors? 

2. What region or what countries does your fund manager focus on? (Morningstar)

Foreign Funds often spike while U.S. funds are dragging so a portfolio that balances the risks can offer good return potential and diversification. Check with your fund manager and the Morningstar fund rating to examine a target fund’s past returns. Check the funds exposure to emerging markets and volatile local influences. You must understand the degree of insulation from American markets in order to accurately assess the risk in opposition to the perceived potential returns of small cap foreign companies. (Morningstar)