Yield-starved American retirees are always looking for a way to maximize returns. Sometimes they read about investing in Brazil, Japan, Korea, Malaysia and other faraway places. They go to seminars and hear pitches for investments in countries where the Gross Domestic Product is improving and where growth prospects are tantalizing.
And they start to wonder, should I try to get a piece of the action? Should I put some retirement savings in one of those one-country funds instead of keeping it all in the bank?
Countries come in and out of favor regularly, so Mike Rocco, an equity analyst at Morningstar, gets a stream of calls from financial reporters and others to find out if the countries currently in favor would be good for investors.
Not for the Vast Majority
“I’m not a planner and I don’t give advice,” Rocco said. But he does have some thoughts about older people sinking retirement money into one-country mutual funds, even in countries that are doing well. In brief, he said, “the vast majority of Americans have no business investing in one-country funds.”
One-country funds are, in Rocco’s view, too concentrated. The danger for the investor is that the investment will be prone to any problems that may occur in the country where the money is invested. Then the retiree risks seeing the value of the investment decrease.
Obviously, the investor benefits when the country does well for a protracted period, say for 10 years. But, still, older people generally want less risk, not more, Rocco said. In addition, they have less time to recover from a financial setback, so for them, “geographic concentration is risky.”
Another factor is that older people are not in the accumulation phase of life anymore. Even if they see a market or region has gone up 40 percent, they still should ask, “What is the worst this can do?” Then they should ask themselves if they could stomach that.
Americans also should examine whether they can get their money out of the investment if they want to, and whether the government of the foreign country has regulations to protect investors, he said.
If the client wants some international exposure, and if the advisor agrees that would help the overall plan, “why not look at something like a diversified emerging markets fund?” Rocco asked. “Why not let the fund manager pick the best opportunities throughout the developing world in Korea, Asia, Malaysia or elsewhere?”
Think of owning a single-country fund as being comparable to owning a stock, he suggested. “It’s OK if the client has money to invest in a risky stock (if holding diversified assets elsewhere), but otherwise be cautious.”
Bond Fund Example
Aaron Dillon sees it differently. He has been going around the country talking with registered investment advisors and broker-dealers about how he thinks a one-country fund – in particular, a fund that invests 100 percent in Chinese bonds – could be good for older Americans.
Dillon is managing director and a U.S. product developer at Harvest Funds. The firm is a big mutual fund company headquartered in Beijing. It has set up a New York office, staffed it with U.S. wealth and asset management executives, and has developed plans to market Chinese- and Asian-focused funds to U.S. investors.
Harvest’s first U.S. offering is the Harvest Funds Intermediate Bond Fund – hence Dillon’s interest in advocating for Chinese bond investments.
Here is his argument: Older people do need safe stable income, said Dillon, himself an American with experience at U.S. investment firms. “The income should not be wild, or change every month. They need simple products,” he said.
But many older Americans also need greater yield than is available from bank certificates of deposit, U.S. Treasuries and corporate bonds, Dillon contended. “Ten-year U.S. Treasuries are paying from 2 percent to 2.5 percent, and corporate bonds are paying from 3 percent to 3.5 percent. How can you live on that?”
Some Americans respond by investing in risker asset classes with B or BB credit ratings or investing in alternative asset classes, he said. So Harvest decided to develop a “different kind of retirement income strategy” for older Americans to consider, one that invests primarily in investment grade and high-yield, high-quality China bonds (which in August were yielding at or above 7 percent, he said).
The fund is structured to pay out monthly checks without dipping into principal, plus a bonus in December. It’s a total return strategy, designed for income. The checks are based on the coupon payments, so they can change.
Dillon acknowledged that some Americans resist investing in anything in China or anything international. “If they’re spooked by it, I say ‘don’t buy this fund’ and I move on.” But he has found others are interested and want to learn more, so he thinks some will like the approach.
About the investment being too concentrated, because the fund invests only in China bonds, Dillon said he does not recommend that people put 100 percent of their portfolios into the fund. “Investors need to be diversified, and invest in line with their risk profile. We are telling people, maybe put 5 percent of the intermediate exposure into this fund, and if you like it, try more.”
Not for Retirement Money
Eric Jacobson, an analyst at Morningstar who specializes in bonds, said that for American investors in particular, a bond fund that focuses on a single country would be too much of a concentrated bet, particularly for retirement money.
“If you buy a fund focused on a single country, you’re making an implied bet on many things about that country, including but not limited to the policies and financial decisions of its government,” he wrote in an e-mail. “I think most investors would prefer to allow a fund manager to do fundamental research on a variety of countries and choose those whose bonds they believe offer the best risk/reward tradeoff.”
Joe Tomlinson, a financial planner and advisor from Greenville, Maine, has a few recommendations for clients who are considering such investments:
Read the offering carefully before investing. Does it lock in the interest rate? Does the country’s government have a right to make changes to the offering after issue?
Find out if and how the U.S. investor can get money back out of the fund or investment.
Ask whether the fund company uses a facility such as the Securities Investor Protection Corporation (SIPC). SIPC is a Washington, D.C., organization that works to help recover funds when cash and securities are missing from customer accounts of a brokerage that has failed.
Consider whether using a basket of overseas bonds from a number of other countries instead of a one-country fund might be better than a one-country bond fund. Or consider using an international equity fund for global exposure.
In general, Tomlinson said he likes to see clients, even retired clients, do at least some international diversification rather than invest only in U.S. securities. “U.S. and other countries do better at different times,” he explained, “so this helps keep the portfolio from being exposed to the risk of only one country.”
However, he prefers that clients do the international investing on the stock side of their portfolios. For instance, a 75-year-old might have 30 percent of assets in stocks, and maybe 30 percent of those assets could be in international stock funds. “It’s easier to find international funds and diversify them on the equity side,” he explained.
As for bond investments, he prefers no international exposure there. “I like to keep these investments simple. It’s the safe money place for the client’s money.”
Reuters said China’s Ministry Of Commerce reported in late August that foreign direct investments from the U.S. rose 11.4 percent in the first seven months compared to a year earlier.
That is the kind of information that raises Americans’ curiosity about one-country investing. The figures don’t address client needs, the total economic picture, or any aspect of personal investing or retirement income. But it is information that may excite or interest some clients, so advisors will probably need to keep on top of one-country trends and be ready to provide individualized guidance when asked.