"Street Critique"-with Tom Petruno of the "Los Angeles Times."
Wednesday, November 22, 2006PAUL KANGAS: For the second straight year, U.S. investors are pouring more money into foreign stocks than domestic issues. But tonight's "street critique" guest wonders if there are reasons for that to change. Joining me now is Tom Petruno, markets columnist and financial writer at the "Los Angeles Times." Tom, welcome to NIGHTLY BUSINESS REPORT.
TOM PETRUNO, FINANCIAL WRITER, LOS ANGELES TIMES: Good to be with you, Paul.
KANGAS: Tell me why investors have been finding foreign stocks so attractive.
PETRUNO: Well, a big reason here is simply performance. People are chasing performance, because foreign markets overall have been the place to be in this decade, completely reverse in the 90s. In the 90s, you made vastly more money just keeping your money in U.S. equities. In this decade, that has flipped. Foreign markets in particular in the last five years have done about I think twice as good as U.S. equities. So people are clearly chasing performance. They see where the numbers are. They're going there. I think another aspect of this is simply that people are recognizing that they need to be overseas. They need to have foreign diversification. They didn't need it in the 90s, but they need it now. And I think they recognize that. And I think, although it's certainly a rush of money -- six times as much money going into foreign stock mutual funds this year as domestic stock mutual funds by American investors, they're playing catch-up. But I think it's a smart thing for a lot of them to do. I think they're probably underweighted in foreign stocks.
KANGAS: Tom, with U.S. stock indices hitting new highs on such a regular basis recently, do you think we'll see a shift back to domestic stocks on balance?
PETRUNO: I think that's happening now. I think a big part of the performance though in the U.S. market, especially in the last couple months, is the catch-up of a different kind, which is a lot of portfolio managers in this country are way behind the eight ball. They were too cautious in the summer. They missed the rally as it started in August. I think you're seeing a lot of hedge funds and other money pour into the U.S. market, especially large caps, capitalization stocks, but also smaller stocks in the last month or so. A lot of this I think is professionals playing catch-up. A lot of people are asking the question what happens with the turn of the calendar in January? Will money continue to flow into the U.S. market? And one big question of course is the outlook for U.S. growth, especially relative to foreign economic growth next year.
KANGAS: Well, what's the best way, if you're not invested in foreign markets, what's the best way to get a piece of the action?
PETRUNO: Well, clearly, for most people it's going to be diversified mutual funds. There is just really no great substitute for people.
KANGAS: Not any one country, but funds that have stocks in many countries overseas?
PETRUNO: Absolutely, absolutely. And every major mutual fund company has diversified. That's the easiest way for people to get in and it really makes the most sense for them and that's what they're doing. That's how they're responding to this. It's very difficult for people to buy individual foreign stocks. They can do it, but it takes a lot more work.
KANGAS: What kind of allocation right now would you suggest, 50 percent domestic, 50 percent foreign?
PETRUNO: I think that's a little aggressive. What we saw in mid-May to mid-June by the way was a reminder just how volatile a lot of foreign markets can be, particularly smaller markets. A lot of those markets fell twice as much in that period as the U.S. market did. So a lot of financial planners used to tell their clients that 15 to 20 percent of your total stock portfolio in foreign. Now more of them are up by around 30, 35, 40 percent. I think that makes sense.
KANGAS: (INAUDIBLE) very much so. Unfortunately, we're out of time Tom, but I want to thank you very much for joining us.
PETRUNO: My pleasure.
KANGAS: My guest, Tom Petruno of the "Los Angeles Times."
