Diversification is a well-known strategy to help reduce the risk of investment. And with international stock markets accounting for about 44 percent of the world’s capitalization, a broad range of investment opportunities exist outside the borders of the U.S.1
Two common investment opportunities that exist outside of the United States include international mutual funds and global mutual funds. But what’s the difference between the two? And are those two options enough or should you take your diversification efforts a step further?
Looking at each fund’s definition, advantages and disadvantages, we’ll break down how international and global mutual funds work to help you better understand your investment options and what third option is out there if you want to do more.
International mutual funds only invest in markets outside the United States. For investors, the biggest advantage an international fund provides is its ability to control the allocation of national and global stocks.
This control allows investors in international funds to separate investments in U.S. markets from investments in non-U.S. markets, giving greater control of their overall investment portfolio, as opposed to global funds which provide no separation.
Global mutual funds invest in global stock markets without excluding U.S.-based stocks. One advantage created by a global mutual fund is its ability to capitalize on the shifts in relative opportunities these markets may present at any given moment.
However, by consolidating into one fund, investors have reduced visibility and control over their overall portfolio’s separation between domestic and international stocks.
Advantages and Disadvantages
International mutual funds and global mutual funds each have some pros and cons that investors should be aware of.
Depending on how a global fund is managed, and whether an investor has other investments, there could be overlaps in domestic markets.
For example, an individual investor could have stock in a domestic company, then choose to invest in a global fund to access global markets. This fund may then choose to invest in the same stock the investor already owns. This, in turn, limits diversification, which may be one of the reasons for investing in a global mutual fund in the first place.
Such an investor may opt for an international fund in place of a global fund to reduce the chance of overlap while still accessing international markets. With this in mind, it’s important to know that asset allocation is an approach to help manage investment risk and is not a guarantee against investment loss.
Investors should also be aware of their chosen fund’s approach to the inherent currency risks of international and global funds. Some funds choose to engage in strategies that may mitigate the effects of currency fluctuations, while others consider currency movements – up and down – to be an element of portfolio performance.
Also, it’s important to be aware that both global mutual funds and international mutual funds may face different taxes depending on the location of the fund. For example, mutual funds located outside of the United States could be considered a Passive Foreign Investment Company, which processes taxes under a different set of rules, when compared to U.S.-based international or global funds.2
Now after talking about the two most well known ways that you can diversify your wealth from within the U.S., there is also a third option: taking your diversification efforts a step further by engaging an offshore registered investment advisor or wealth manager.
Working with a financial professional outside of your home country enables you to profit from their experience and expertise which will most likely defer from your local advisor. You can benefit from your wealth manager's geographical proximity to stock markets other than the U.S. You can move part of your money to a stable and safe financial jurisdiction and put together a portfolio that completely excludes the U.S. dollar and the U.S. stock market, while at the same time taking into consideration your personal and financial situation thus providing a tailor-made offer that a fund never could.
Additionally, by using an asset manager outside your own country, you gain a degree of financial privacy and asset protection. Since lawyers size up targets for lawsuits by looking for their money, someone considering suing you may decide to find a target with more visible wealth. In addition, a portfolio manager outside your domestic jurisdiction is likely to target different investments than a domestic manager would, leading to a greater investment diversification, and thus greater resiliency in your overall portfolio.
The nuances of non-U.S. markets can be difficult for average investors to understand, let alone time-consuming. We therefore usually recommend entrusting your investment to a professional. Such professionals have the support and knowledge to properly understand global markets, and can provide tailored expertise and advise fitting your personal situation.
Whether an international mutual fund or a global mutual fund will be sufficient with you or if you would benefit more from working with an offshore investment advisor depends on your unique financial circumstances. Always consult with your financial advisor before making any investment decisions, and be sure to understand the advantages and disadvantages of all of your investments.
If you are interested in learning more about this latter option, please do not hesitate to reach out to us. We would be happy to discuss your situation and answer any questions you may have: