When a fund sector or category does well, fund investors' negative associations with that area declines. Since outperformance can actually increase the severity of the next downturn, this thinking leads to misplaced confidence in fund categories that should inspire wariness - which is exactly what is currently happening with international funds.
A recent survey of wealthy American investors found that more than half believe U.S. markets are riskier than international markets. That's a reversal of traditional thinking and a sign that investors may be taking potential problems in overseas markets too lightly."
Over-enthusiastic international investing can be especially hazardous because the volatility of international funds can vary wildly.
Along with specific countries, sector allocation is something investors may not be heeding closely enough in their international fund, said Jeffrey Kleintop, chief market strategist at LPL Financial Services. He said a fund that concentrates too heavily on the BRIC countries (Brazil, Russia, India, China) could be presenting a fairly sizeable risk for that investor, given the sectors involved.
'They've been an interesting area to invest in recently, but when you take a look at commodities exposure there, energy and materials make up 50% of the market cap of those countries. You're making a pretty big bet on the continuation of the bull market for commodities...that's a risk you may not be aware of.'
Conversely, some international funds may be lacking in exposure to certain sectors, Kleintop said. 'Most international markets are more value-oriented than those here in the U.S. For example, looking at the EAFE (Europe, Australasia, Far East) Index, that only has one-third the weighting of technology we have in the S&P 500, half the weighting we have in health care. We would consider those to be growth sectors from a style perspective."
This phenomenon is taking place in other fund categories as well. A few years ago – before the big run-up – precious metals and other commodities were considered high risk/low reward investments (when tech was high reward/low risk…). Today both individual and professional investors - and most analysts and reporters - view funds that invest in these areas in a much more positive light.
To get a better idea how risky a fund or category is, check MAXfunds' risk level graphic on each fund's data page (and ignore your easily-swayed-by-past performance gut). To get a handle on how confident fund investors are in any fund category, take a look at our innovative fund category numbers on each fund’s data page here at MAXfunds.com.
Since how outperformance can lead to future underperformance (reversion to the mean) we have a Category Outperformance 1-5 measure – “bad” categories have outperformed other fund categories in recent years. Category Fat Fund shows how many funds in the category are too big – another sign investors are putting too many chips into a fund category. The Category Hot Money level measures recent inflows of new money into a category. The MAXratings Category Rating takes all three into consideration.
Are You an Overconfident International Investor?
When a fund sector or category does well, fund investors' negative associations with that area declines. Since outperformance can actually increase the severity of the next downturn, this thinking leads to misplaced confidence in fund categories that should inspire wariness - which is exactly what is currently happening with international funds.
A recent survey of wealthy American investors found that more than half believe U.S. markets are riskier than international markets. That's a reversal of traditional thinking and a sign that investors may be taking potential problems in overseas markets too lightly."
Over-enthusiastic international investing can be especially hazardous because the volatility of international funds can vary wildly.
Along with specific countries, sector allocation is something investors may not be heeding closely enough in their international fund, said Jeffrey Kleintop, chief market strategist at LPL Financial Services. He said a fund that concentrates too heavily on the BRIC countries (Brazil, Russia, India, China) could be presenting a fairly sizeable risk for that investor, given the sectors involved.
'They've been an interesting area to invest in recently, but when you take a look at commodities exposure there, energy and materials make up 50% of the market cap of those countries. You're making a pretty big bet on the continuation of the bull market for commodities...that's a risk you may not be aware of.'
Conversely, some international funds may be lacking in exposure to certain sectors, Kleintop said. 'Most international markets are more value-oriented than those here in the U.S. For example, looking at the EAFE (Europe, Australasia, Far East) Index, that only has one-third the weighting of technology we have in the S&P 500, half the weighting we have in health care. We would consider those to be growth sectors from a style perspective."
This phenomenon is taking place in other fund categories as well. A few years ago – before the big run-up – precious metals and other commodities were considered high risk/low reward investments (when tech was high reward/low risk…). Today both individual and professional investors - and most analysts and reporters - view funds that invest in these areas in a much more positive light.
To get a better idea how risky a fund or category is, check MAXfunds' risk level graphic on each fund's data page (and ignore your easily-swayed-by-past performance gut). To get a handle on how confident fund investors are in any fund category, take a look at our innovative fund category numbers on each fund’s data page here at MAXfunds.com.
Since how outperformance can lead to future underperformance (reversion to the mean) we have a Category Outperformance 1-5 measure – “bad” categories have outperformed other fund categories in recent years. Category Fat Fund shows how many funds in the category are too big – another sign investors are putting too many chips into a fund category. The Category Hot Money level measures recent inflows of new money into a category. The MAXratings Category Rating takes all three into consideration.
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