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Global Mutual Funds

As the global economy continues to grow and expand, so do the investment opportunities and possibilities for higher returns. Remember, investments offering higher returns generally involve higher risks.

Is “Global” Part of Your Everyday Life?

The global connection of people and ideas around the world has become almost instantaneous, and the physical trade barriers between countries have been significantly reduced. Local markets are global markets and global producers are often local producers.

Historically, U.S. investors have mainly purchased the securities of U.S.-based companies. Our increasingly connected world is changing that dynamic. Trade is a two-way street, and increased trade not only creates new and growing markets for U.S.-based companies, it creates investment opportunities in foreign companies. But, how foreign are these companies? Global products are so interwoven into our everyday lives; sometimes we don’t even recognize them as foreign.

Take a quick test. Which of the following are brands of foreign-based company (or a majority-owned subsidary of a foreign-based company)?

Click to test your knowledge

  • Switzerland

  • Germany

  • Belgium

  • Japan

  • U.K.

  • Switzerland

Show Answers

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Global Mutual Funds Cover a Lot of Territory

Global funds are often categorized by where they invest. Some of the most common kinds of funds are:

Global equity and fixed-income funds. Sometimes called world mutual funds, they typically have the broadest geographic investment mandates and are usually able to invest anywhere in the world. They may invest a larger portion of their assets in the United States and the developed markets of Europe and Asia. Global hybrid funds invest in both equity and fixed-income securities from around the world.

The ability to invest anywhere in the world is one big advantage global funds offer because they have the greatest number of securities from which to choose. Investing globally, however, may involve higher risks depending on market conditions, currency exchange rates and economic, social and political climates of the countries where the fund invests.

International equity and fixed-income funds. Often called foreign funds, they invest outside the United States. They typically invest in the developed markets of Europe and Asia. Depending on their investment strategy, they may also invest in emerging or frontier markets. An international hybrid fund invests in combinations of equity and fixed-income securities from non-U.S. countries.

By investing outside the United States, these funds can potentially capitalize on different economic cycles occurring in different countries at different times, thereby complementing funds that invest primarily in the U.S. Investing abroad, however, may involve higher risks depending on market conditions, currency exchange rates and economic, social and political climates of the countries where the fund invests.

Regional equity funds. As the name suggests, these funds concentrate in a particular region of the world. For example, a regional fund may focus on the stocks of Europe, Latin America or Pacific Rim nations. Such a focus can be rewarding if the region is experiencing high growth rates, as has been the case in Asia at various times over the last two decades.

However, the limited geographic scope of these funds may increase their volatility as negative events in one country often spill over into neighboring countries, dragging down the region as a whole.

Country-specific equity funds. These funds have very specific investment mandates that restrict the majority of their investing to a single country. Typically, they focus on a country with a significant stock market or stock market growth potential. A narrow focus, however, can substantially increase risk.

Emerging and frontier markets funds. These funds invest principally in the less developed markets of Africa, Latin America, Asia and Eastern Europe. Typically, these types of regions are undergoing dramatic economic change, such as transforming from a state-run economy into a free-market-based economy. Compared with more mature markets, investing in emerging or frontier markets may offer the potential for sharp growth rates.

However, investments in foreign securities involve special risks including currency fluctuations, and economic and political uncertainties. As a result, such funds can experience significant volatility.

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A World of Potential Opportunity

With so much global integration taking place, limiting investments to U.S.-only mutual funds also means eliminating potential opportunities from around the world.

Foreign markets have expanded substantially over the past 32 years. In 1982, U.S. stocks represented 56% of the world’s equity market capitalization. By 2012, foreign markets had become a solid majority of the opportunities, expanding to account for 65% of the world’s equity investments.1

Foreign vs. U.S. Market Capitalization

Sources: The World Bank: World Development Indicators: Standard and Poor’s, Global Stock Markets Factbook (2013, 1995) and supplemental S&P data, as of 1/28/2014.

In fact, many of the world’s largest and best-run companies are based on international shores. Looking abroad you’d find:

  • 9 of the world’s 10 largest banks
  • 8 of the world’s 10 largest telecom services companies
  • 7 of the world’s 10 largest automobile companies
  • 6 of the world’s 10 largest commercial and professional services
Source: Morgan Stanley Capital International All Country (MSCI AC), World Index, as of December 31, 2013.

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Why Global Diversification?

One of the best reasons to consider investing globally is the diversification it can provide. Historically, international markets have experienced different economic cycles than U.S. markets. When the U.S. economy has slowed or gone into recession, other economies, at times, have continued to grow.

Broadening investments into a variety of foreign markets may provide for a smoother ride in the long term and allow the opportunity to capitalize on the economic growth and widespread prosperity of several emerging markets.

Global Economies Often Experience Different Economic Cycles

Annual 2013 GDP Growth Rates

Source: International Monetary Fund, World Economic Outlook Database, October 2013, as of 1/28/14.

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Potential for High Rewards

As overseas economies and companies have thrived, the performance of many international stock markets has been strong.

Even more important than short-term performance, however, is the fact that foreign markets have demonstrated long-term strength. As shown below, for the 25 years ended 12/31/2012, performance of the U.S. market only ranked 9th out of 23 of top global developed markets. Please keep in mind that past performance does not guarantee future results.

U.S. Ranked 6th In List Of Top Global Developed Markets

Average Annual Total Returns for 25 Years Ending 12/31/2013 Double-Click for Larger View

Source: © 2014 Morningstar, Morgan Stanley Capital International (MSCI). Stock market performances are measured by the MSCI World Indexes for those countries that have at least 25 years of history. Performance figures are historical and include reinvested dividends. Indexes are unmanaged, and one cannot invest directly in an index.

The chart is for illustrative purposes only and does not represent the performance of any Franklin, Templeton, or Mutual Series fund.

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Potential for Increased Consumption

The world is economically integrated and becoming more so. As developing nations grow wealthier by filling the demand of developed nations for their exports, they are growing a middle class. In turn, this group collectively aspires to the goods associated with the wealth of more developed nations, which increases global consumption, drives global trade, produces investment opportunities and drives stock markets.

Based On Population, Some Countries Have
High Consumption Potential

Sources: © 2014 The World Bank: World Development Indicators: United Nations, World Population Prospects; International Road Federation. World Statistics; and International Telecommunication Union, World Telecommunication/ICT Development Report and Database. As of 2012 (most recent data available, 2005-2012). Internet users are defined as people having access to the worldwide network.

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Understanding the Risks

All investments involve risks, including possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as the prices of bonds in the fund adjust to a rise in interest rates, the fund’s share price may decline. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Investments in emerging markets, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Because these frameworks are typically even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with emerging markets are magnified in frontier markets. A fund’s ability to invest in smaller company securities that may have limited liquidity involves additional risks, such as relatively small revenues, limited product lines and small market share. Historically, these stocks have exhibited greater price volatility than larger-company stocks, especially over the short term. All investments in a frontier market fund should be thought of as long-term investments that could experience significant price volatility in any given year. A frontier market fund is designed for the aggressive portion of a well-diversified portfolio. These and other risk considerations are discussed in a fund’s prospectus.

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Important Legal Information

For more information on any of our funds, contact your financial advisor or download a free prospectus. Investors should carefully consider a fund’s investment goals, risks, sales charges and expenses before investing. The prospectus contains this and other information. Please read the prospectus carefully before investing or sending money.

Diversification does not guarantee a profit or protect against a loss.

This material is provided for educational purposes only and is not intended as investment advice or an offer or solicitation to buy or sell securities.

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