Today's comment is by Eric Roseman, our Investment Director and editor of Global Mutual Fund Investor.
Dear A-Letter Reader,
Nice things come in bigger packages in the U.S. in 2007. And even nicer things are waiting in the global markets this year.
For the first time since the bull market began in 2003, U.S. smaller companies are trailing large-cap stocks in 2007. The performance differentiation is modest. But the transition is still worth noting because small stocks have blown away large company equities over the last four years.
Large stocks, as defined by the S&P 500 Index, are up 7% this year compared to 6.3% for the Russell 2000 Index of small-cap stocks. And when it comes to relative values, larger stocks are 36% less expensive compared to their smaller brethren. The trailing price-to-earnings multiple on the Russell 2000 is at a whopping 28 times versus 18 times for the broader market.
Historically these small-caps have outdone large-caps, at least until this year. Since March 2000 and the onset of the bear market (which ended in 2002), U.S. small-caps have blasted past large-caps by a country mile. These mighty-mites have recorded an impressive 65.2% total return compared to just 11.1% for the S&P 500 Index.
Look What's Happening on the Global Stage
But if you want to talk about a huge differential, take a look at what's happening in global markets compared to the United States.
The U.S. small-cap returns since 2000 pale in comparison to the returns generated in foreign stocks. This screaming bull market for foreign stocks has coupled with soaring international currencies to generate skyrocketing profits since 2002. According to mutual fund-tracker, Morningstar , foreign stock funds have more than doubled the return generated by U.S. smaller company funds since 2002.
The Morningstar Foreign Small/Mid Growth Fund Index has surged 23% a year over the last five years. That's far outpaced any U.S. domestic mutual fund category (except REITs, up 21% annually over the same period).
Even foreign large-cap stocks, which have also lagged behind international small-caps in this bull market, have beaten out U.S. stocks! See below to see how large-caps and small-caps measure up both internationally and domestically, according to Morningstar.
Since 2002, the Morningstar...
- Foreign Small/Mid Growth Fund Index -- gained 23%
- Foreign Large Growth Fund Index -- gained 14.2%
- U.S. Small-Cap Growth Index -- gained 10.1%
- U.S. Large-Cap Growth Index -- gained 6.8%
All of these numbers represent average yearly returns - and you can see right away how anything international has outpaced domestic - and how overseas small caps take top honors.
Higher Currency Values Creates Higher Returns
Since the dollar peaked more than five years ago, stronger foreign currencies have also helped international stocks log these impressive returns.
With the exception of the yen, which basically trades at the same level versus the dollar compared to five years ago, the euro, sterling and the natural resource currencies of Canada, Australia, New Zealand and South Africa have all surged against the sagging buck since 2002.
According to Morgan Stanley Capital International/Barra , local currency returns for the MSCI World Index of industrialized bourses show average yearly gains of 12.5% since 2002 in U.S. dollars; but in local currencies, the bourses have risen 9.9%.
In other words, the declining U.S. dollar has accounted for more than one-quarter of the annual total return from foreign stocks over the past five years - earning you an extra 2.6% per year.
Record Highs for Overseas Stocks!
In 2006, a record 93% of total stock inflows were directed to foreign mutual funds. And with this historic currency potential, your offshore mutual fund returns are now worth more when they're converted back to dollars. That's why Americans are lunging for international stock funds left and right.
International market returns have trounced domestic stock gains five years straight, through the end of 2006 -- and the trend is continuing into its 6th year so far in 2007. But if U.S. markets begin to outpace international exchanges and the dollar stabilizes following a five-year freefall, then mutual fund flows favoring international markets could quickly reverse. Stay tuned!
ERIC ROSEMAN, Investment Director
P.S. As stock inflows continue to move towards foreign mutual funds, I'll be recommending the few distressed funds left around the world to my Global Mutual Fund Investor subscribers. I've helped my subscribers know when to buy, sell and hold the world's top-performing offshore mutual funds since I began this service 15 years ago.
Just this month, I recommended a fund from a region that has climbed over 300% in U.S. dollars since 2000. And I still see much more upside potential. To find out where on earth this red hot fund invests its assets, click here to try a risk-free trial of my service, so you can get the full story.