Recent mutual fund flows have picked up momentum in international markets, partly driven by advisors looking for buying opportunities and increased diversification.
Data provided by the Investment Company Institute showed heavy inflows for international long-term mutual funds and large outflows in domestic products for a one-month period ending Sept. 10. Flows into international equities have outpaced U.S. equities $135 billion to $28 billion over the past one-year period, according to Morningstar. For August there was an estimated $5.5 billion of inflows toward international equities, compared to $9.5 billion in U.S. equity outflows, according to Morningstar.
BEHIND THE INFLOWS/OUTFLOWS
Experts say advisors are among the main drives of the inflows.
"As advisors seek both greater total return opportunities and the need to meet clients’ growing demand for capital preservation, they will continue to look internationally to expand their investment universes to aid them with portfolio construction," explains Barry Fennell, senior research analyst at Lipper.
"The trend towards international, over domestic long term funds, has had some tailwinds favoring it over the past year or so," he adds, "as investors have become skittish about valuations in the domestic equity market, (and) following its strong recent absolute performance."
Brent Schutte, senior investment strategist at BMO Global Asset Management, says a tightening of monetary policy in the U.S. and the chance of an interest rate hike early next year is contributing to outflows in domestic funds. On the flip side, he adds, the European Central Bank is not so far along with its quantitative easing program, resulting in cheaper valuations.
"The U.S. is becoming more hawkish in many ways," says Schutte, whose company has increased international exposure with its affiliated RIA, BMO Harris Financial Advisors. "We see valuation opportunities in some of these other economies."
David Richmond, founder of Jackson, Mich. - based Richmond Brothers, says advisors have shifted to foreign funds as European markets have lagged behind the U.S. over the last two years, also to seize investment opportunities overseas. Richmond says he just started allocating more toward European funds, but is planning to do so slowly.
"Everybody is trying to pick where the 2009 of Europe is. So, when do I invest in Europe, and try to ride the recovery up?" asks Richmond. "It's more opportunistic driven than risk driven."
Andrew McNair, president of Pensacola, Fla.-based Swan Capital, adds that advisors worried about a repeat of the 2008 financial crisis are driving increased flows to international funds. Advisors, he says, also are looking to diversify client portfolios. Investments in a more conservative portfolio are usually 37% global income and 14% in international/emerging markets, explains McNair.
"Advisors have a duty of encouraging international exposure to their client’s portfolios, because putting all their eggs in one country, even if it’s the great country we call home (the U.S.), is not patriotic but foolish," says McNair.