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Show SVSST UV UCU CEL ETEECEEKKy eS DAILY HERALD rz Sunday, February 5, 2006. | WALL STREET JOURNAL SUNDAY. _The Weekly Guide to Managing Your Money ©2006 Dow Jones WSJ.com/Sunday Your U.S. Fund MayBe Scurrying Abroad By ANDREW BLACKMAN hinking pf boosting your ex- posure to foreign stocks? Not so fast. The managers fund portfolios with neatlittle buckets of, say, 60% domestic stocks and 40% foreign stocks. But the fast-growing foreign holdings of ‘some U.S.-stock funds may mean Going Global Here are three large U.S.-stock mutualfunds at which the percentage ofassets invested in foreign stocks hasincreased. 2001 © * 2002 iM 2003 MM 2004 HM 2005 that your allocations have gotten seriously out of whack. You can check a fund's expophasizing U.S. stocks have recently been investing significant sure by looking at a recent share- chunks of their portfolios outside One wayto gauge the foreign expo- the U.S. The S51 billion Fidelity Magellan Fund, for example, recently disclosed that 25 sure in youroverallportfolio is to holderreport or the fund Website. run your holdings through a simple, free Web-based saysIe like fulio was in foreign securities at yearend, up from just 4.2% three juonths earlier. Under new portfolio manager Harry Lange, Finnish cellphone maker Nokia displaced General Electric as Fidelity Magellan's largest investment, and three of the top 10 holdings are Japanese companies. Another giant fund snapping up loreignstocks is American Funds’ Fidelity Magellan Growth Fund of America Dodge & Cox Stock Note 2005 figures are asof year end: prior years ave averages. Sources: Momingstr, the companies haven't done nearly as well over the past decade. Manyindividual investors have also been sniffing out bargains _ managerof the $3.6 billion T. Rowe very high-quality multinationals Price Value Fund, whose foreign ex- that are based outside the U.S., posure has increased to 9.2% from 2.5% five years ago. and that has expanded our universe somewhat. What you're charting is the integration of the global economy.” Mr. Gunn notes that many of overseas, pumping moneyinto dedicated foreign-stock funds in the Mr. Linehaninvested in French oil firm Total, for instance, be- hopeof higherreturns. It’s paid off. cause he thoughtit had better long- S128 billion Growth Fund of Amer- sofar in 2006. The MSCI EAFEIn- term prospects than Exxon Mobil ica. A more American-sounding dex (of stocks in “Europe, Australasia and the Far East”) is up 4.7%. or ChevronTexaco andwas trading fund is hard to imagine, yet its foreign exposure is now almost Is of assets, up from 8.4% five In the U.S., after a 1% decline last week, the DowJonesIndustrial Av- years ago. Dodge & Cox Stock erage is up just 0.7% this year. “Many managers in the last few years have said that foreign Fund, with $52 billion in assets, also is at almost 18%, up from6.3% five years ago. (Dodge & Cox Stock und Fidelity Magellan are -both closed to most newinvestors.) The $3 billion Janus Contrarian Fund has 43°: overseas, including a big stake in Indian stocks; five vears ago, the figure was 6%. The average foreign exposure of all U.S. diversified mutual funds, whilestill relatively small at 3.6% of assets, has doubled in the past five years, according to researcher Morningstar in Chicago. Playing Catch-Up Fund managers saypart of the 1eason they are buying overseas is lu snag cheaper stocks. There may still be bargains abroad because foreign stocks, despite beating U.S.stocks in 2003, 2004 and 2005, at‘a more attractive valuation: “We're somewhat indifferent to whether we receive the earnings in eurosordollars.” ‘The World is Changing’ But there's a bit more going on tor of mutual-fund research at here than justtraditional bargainhunting. In the face of a rapidly Morningstar. “Now, that gap has narrowed slightly, but it's still globalizing economy, some managers are now starting to take a there.” Anotherplusfor foreign stocks: sector-based approachto investing ki rather than a geographic one. Afterall, in an economy where Swiss drug firm Novartis generates a higher proportion of its Manyinvestors expect the dollar to come under pressure over the coming years as the U.S. grapples ts/expected to ask for a $180 bil Heineken or {SABMiller] is just silly.” looking at a foreign-currencyplay, we're looking at the underlying company,” says John Linehan, the world is changing,” says Dodge & Cox CEO John Gunn, referring to the shift of Dodge & Cox Stock Fund towardsforeign compa- tions for individual investors. First, your foreign exposure may nies. “There are more and more Manyinvestors try to design their | Bond Retums: The 30-year tax refund more quickly—an impor- dex, that means equal weight for tant factor since mosttaxpayers do get refunds eachyear. Last year, stocks from giants Exxon Mobil such bonds in October 2001. amid fund was $2,171, up 2.1% from nue Service says. The average rethe prior year. Byfiling early, you avoid last budget surpluses slightly from $64.2 billion in Novem: ber, which followed October's tecord $68.1 billion. minute panic attacks that can lead to costly | TOM HERMAN'S ™stskes, ——————_ eventy TAX TIP veteran tax Fed Up? The Federal Reserve preparers. raised its target for short-term inter | Waiting until mid-April to dump the est ratesto 4.5%, the 14th in. Bernanke succeeded Alan Greenspan as chairman, It's un: clear if the Fed will raise rates againat its next meeting, in March, or hold off in fear of hindering the economy, B Stocks Teoter: The Dow Jones Industeal Averagefell 1% last week, amid inflation jitters and somedisappointing earnings. The DJIA is narrowly positive for the Composite index fell a steeper ® Good Job: The unemployment rate fell to its lowest point in more than four years, coming in at 4.7% 1.8%, butis still up 2.6% in 2006. last month from 4.9% in December. year so far, up 0.7%. The Nasdaq THE WALLSTREET JOURNAL 1 Ment ated Ceo Stn Lnten Via Koren Uomnates Mark Ther William BC ney Vict Pats See horns. ‘i =| Seti RR, Campbell Avnctaeristas Din tem 42000) tb pcan = ty Mevet th NY, WIND B Less Than Zero: The personal Savings rate fell to a 73-year low in 2005, aropping to a negative 0.5%, thé Commerce Department re ported. The last time the savings fate was negative was duning the Great Depression. Consumer spend: Mistakesare fairly common whenrolling money between retirement plans—say, from a 401(k) to an IRA, or from one IRA to another, Tax rules provide a 60-day window to move the money withouttriggering tax. If you miss the deadline, the entire distribution is taxable, One common error: people get a distribution check from one financial institution and drag their feet ‘on sending the money to another. Sometimes a family emergency in- tervenes. Or people don’t immediately notice that a new institution has incorrectly deposited their moneyin anordinary taxable account. To avoid problems, it's best to make sure the money arrived and moves directly from your existing account to the new account, without you touching the money. Mr. Slott suggests askingthe financial institution that's accepting the moneytoinitiate the transfer. Then promptly check your new accountto the accountis of the correct type. By Kelly K. Spors Email: forum.sunday03@wsj.com and General Electric all the way down to computer maker Gateway and auto-parts supplier Dana, lately 499th and 500th in terms of corporate stock-market value, or capitalization. For years, this approach has been quietly outperforming the ‘Two funds thatuse an equal-weightstyle RYDEX MORGAN STANLEY =S&PEQUAL cap-weighted index, according to WEIGHT ETF ‘S&P 500 "A" S&P. This superiority comes even after large-cap growth stocks surged in the late 1990s, catapulting the 50 or so biggest S&P 500 Symbol Tyearretun 3-year retum* N/A 22 members—many of them inflated 5-year return’ Expense ratio Front load N/A 0.40 WA 17 07 5.25 Initial minimum N/A $1,000 technology stocks—to starry heights. “Cap-weighting is basi- cally making a bet on the top end” of an index, says Steve Sachs, director of trading at Rydex Invest- ments, a Rockville, Md.-based in- well-known S&P 500 indexed offer- dex-fund providerthatlicenses the ings that dominate the mutual- equal-weight index from S&P and introduced its ETF in April 2003. fund industry—the funds you prob- Two Contenders RSP 15% VADAK 15% Source: Morningstar; data as of Jan. 31 “Annualized would mirror key aspects of the Mr. Lohrey suggests. Mr. Sachs says. Equal weighting some taxpayers wait until later be- your garden-variety index fund with a tweaked, equal-weighted version. There are drawbacks to the tweaked approach. And some think the old warhorses are about to make a comeback,as big stocks catch up with small ones. Thanks to a strong rally in smaller companies (and weakness cause they owe money (although it’s possible to file early, such as in larger shares), the equalweighted version of the S&P 500 through the IRS's electronicrfiling system, and Schedule a payment later, close to the deadline). In some cases, early birds wish they hadn't filed so early, This is | because of a problem that has | | an index. In the case of the popular Standard & Poor's 500-stock in- long periods.” The equal-weight S&P 500 has held its lead over the past decade, gaining 11.9%annualized versus a 9.1% average yearly rise for the equal-weighted S&P 500 and com- laws and other changes. Also, | Equal weighting is a irked investors for years but was especially troublesome during 2004 and 2005in the wake of a complex taxlaw change enacted in 2003. Thatlaw cut the top rate on many types of dividends to 15%, Figuring out how muchof an investor's dividend income qualifies for the 15% rate can be tricky, As a reSult, an unusually large number of *1099° formsthat financial companies and other institutions sent to ably own, where big companiesaf- fect returns more than small ones. index has topped its market: capped cousin in each of the past six years. In 2005, for instance, an exchange-traded fund tied to the Strategy, Rydex S&P Equal Weight ETF (RSP), gained 7.4% while a likeminded mutual fund, Morgan Stan- ley Equally Weighted S&P 500 Fund (VADAX), added 7.5%. The capweighted Vanguard 600 Index Fund (VFINX), meanwhile, rose 4.8%, More Small-Cap Exposure “The equal-weighted index will give you more expgsure to smaller ‘ks,” says David Blitzer, chairman of the Standard & Poor's com- departs from accepted indexing practices. In popular cap-weighted S&P 500 investments such as the Vanguard 500 Index Fund and the exchange-traded S&P Depositary Receipts, or “Spiders,” (SPY), the biggest U.S. stocks carry the big- equal-weifht index, just like 499 of its peers. What's Not to Like ular portfolio rebalancing to keep the stock weights uniform.Selling winners and buying losers can get expensive. (Cap weighting doesn't require such rebalancing; stocks’ ties, @ large securities firm, re weightingin the index just reflects their market value.) cently warned investors not to fhe early this year, says Julia Flenner, a Wachovia vice president in Rich those smaller companies,” Mr. Lohrey says. “They tend to be less the risk of getting corrected statements after you've filed—and then needing to file an amended return, weighted offerings, adds Herb Mor- ego-based investment advisory firm. “Equal ae is more theRydex ETF, with its trailing 12-month dividend yield of 1.05%, according to Morningstar, doesn't have as much Not everyone finds the equal- starters, the strategy involves reg- mond, Va. By waiting, you lessen Equally weighted funds, with their lighter stake in large caps, also are more volatile than cap- weight S&P 500 satisfactory. Vanguard Group, the index-fund pioneer, doesn’t offer the product. “Equal-weighted benchmarks large caps, and most data suggests HOWTO CONTACT US tual funds, which do. The equalweighted Rydex ETF rebalances quarterly and has yet to pay a taxable distribution, says Rydex’s Mr. Sachs. ETFs trade like stocks, gan, chief investmentofficer of Bfficient Market Advisors, a San Di- they do, then the equal-weight should give you a small edge over chcahivtneenasy unload actual shares, than for mu- with a recent market value of about $380 billion, commanded 3.4% of the cap-weignted benchmark. Yet this energy-sector bellwether represents 0.20% of the “qualified” dividends—and had to be revised. Much to their chagrin, some in- about this issue, Wachovia Securi- Portfolio adjustments are easjer for ETFs, which don't have to however, and do incur brokerage commissions. BOW Gusher: Exxon Mobil's fourth Quarter net income was $10.71 bil: Vion, one of the biggest corporate profits in history. vestors got corrected 1099 forms after they'd filed their tax returns. Because of continued concern plement a cap-weighted holding, gest stick. Together, the top 10 companies represent about 20% of the S&P 500. But these goliaths lose their muscle in the equalweighted S&P 500. For example, Exxon Mobil, pose challenges,” says Paul Lo- expected sales for January, buoyed by giftcard redemptions and unusu: ally warm weather, you might pay an accountant or lawyerto help:with your appeal. left behind.” hrey, a member of Vanguard's Quantitative Equity Group. For U.S.retaliers posted stronger-than- fee for seeking an IRS ruling to correct a botched retirement-plan rollover. Translation: “It's going to cost a lot more to correct mistakes now,” says Ed Stott, an accountant and individual-retirement-account specialist in Rockville Centre, N.Y. And thatfiling fee is on top of any fee direct rollover, in which the money to include in the S&P 500. “If you believe that small caps outperform profit fell 43%, hurt in part by lower tax benefits than a year earlier about $3,000 do a “trustee-totrusteetransfer,” or mittee that determines the stocks Skilling and Kenneth Lay got under. way in Houston... Amazon.com's creased, to WEEK fom $95, the “There is enough evidence to Suggest that investors begin to consider investments along sector rather than geographic lines,” Mr. Gallagher writes. “Corporations have already gone global and morewill increasingly do so. We suggest investorsjoin them, or get taxpayers early in 2004 and 2005 Contained errors on the amount of former Enron executivesJeffrey Service sharply in- TIP OF stocks—than amongcountries. ing for December rose 0.9%. 8 Briefly: The criminal trial of Last week, the Internal Revenue tribute equally to performance,” later gives your tax preparer more time to become familiar with new B Nation's Checkup: President Bush. in the annual State of the Union address, called for reducing isan Commission to examine solu: tions to the cost of the Baby Boom generation's retirement tax penalty if something goes wrong. Now there's more reason than ever not to mess up. “With the equal-weighted index, every namehasthe ability to con- Pay to procrastinate. Waiting until oil imports from the Middie East 75% by 2025 and proposed a bipar- LAST WEEK staid, reasonably priced “value” oving money from one retireM ment account to another can be Unsettling, because of a severe But you needn't rush to replace yellowing contents of several shoe boxes on your accountant’s desk isn’t advisable. But some tax advisers say it may crease since June 2004, as Ben ood things have come to those who equal weight. Strategy that gives the same importance to each and every stock in more than 100 million taxpayers received refunds, the intemal Reve- Think that the deficit narrowed panding companies and more be very different than you think. Fi your income tax return early can be a smart move for millions of people—but not everyone.In some cases,it may even backfire Filing early means you get your Treasury bond will be reintroduced at Thursday's governmentdebt auc. tion. The Treasury stopped selling whether the U.S. trade deficit grew or shrank in December. Analysts stance, “growth”stocksof fast-ex- OffRollover, MarketWatch / By Jonathan Burton Congress tomorrow. Another ex pected request: $289 millionto de velop hydrogen-powered fuel cells. partment on Friday discloses There are a couple of implica- ferent types of investments—forin- Keep Hands Filing Later Ee May Be Wise An Intriguing Twist on Stock Indexing A DOWN WEEK: While the Dow Jones earings tell short of analyst expectatons. The Commerce De The authorof the research was Brett Gallagher, co-head of global equity at Julius Baer Investment Management. His conclusion: It's now more important to diversify among industries and amongdif- Check Your Exposure morefor hurricane relief in the 2007 budget request he sends to W Trade Secrets: RonSloan,lead portfolio man- ters is becoming less important. foreign investments, we're not today. In other words, one traditional argumentfor including foreign stocks in your portfolio—that they will zig when U.S. stocks zag—nolonger applies, ager at AIM Charter Fund, another fund that has bumped upits foreign holdings lately, concurs that investing has taken on a more globalflavor. “We're on a global stage andsoif you're managing a large fund, you're owning companies that have a large global exposure whether they're based in the U.S. or not,” he says. “To be analyzing brewers andto only look at Budweiser and Coors while ignoring “I don’t know if it's so much our conscious moveasthe factthat lion spending boost onwars in Iraq and Afghanistan and $18 billion finance misters, fromthe seven St industnalized countnes and Russia, will meet next weekend in Moscow. Investors will be watching for clues to the health of the global y and the impact of recent events in the Middle East sure to foreign markets. But fund managers emphasize that theyfocus on individual companies’ merits. “When welook at Industral Average tumbled last week, Google's volatile shares fell harder after its G8 Meets: The Group of Eight stocks would have a large expo- sales in the U.S. than does McDonald's or Coca-Cola, the place where a company has headquar- ROC LGLCaee Bush's Budget: President Bush lio generate at least a quarter of their revenue outside the U.S., so even a managerwhosticks to U.S. with massivetrade deficits. A falling dollar would boost returns on foreign investments when translated back into dollars. INVESTOR’S CALENDAR THIS WEEK the .U.S.-based companies in Dodge & Cox Stock Fund's portfo- the one at www. (Go to “Tools” and scroll avalto “Instant X-Ray.") But another implication is that, if the world is indeed changing, muchofthe old advice aboutallocating your money among geographical bucketsis becomingless relevant. A recentresearch report found that the correlation between the performanceof U.S. and European stocks has increased from less than 50% in the 1970s to almost 90% Company,Ite. All Rights Reserved. “It's not as easy to invest in over, big-cap U.S, stocks Took attractive. “Right now, the odds are stacked in favor of cap-weighted,” months, the place to be will be the cap-weighted index.” Jonathan Burton writes for MarketWatch (www.marketwateh.com). Email, forum.sunday03@wej.com |