06 Jan U.S. mutual funds and overseas exposure

Q. With so many companies having business in multiple countries, how can I know my U.S. mutual funds don’t have too much exposure overseas?
— Figuring it out

A. It’s a great question.

Many large U.S. companies have lots of foreign exposure, and if you’re talking about mutual funds with hundreds of holdings, it’s going to be tough to find a set percentage for overseas exposure. But you can do some research to have a better understanding of how much business the companies in your fund do overseas.

Globalization has been a boon for some of the biggest U.S. companies, said Lisa McKnight, a certified financial planner with Lassus Wherley in New Providence.

She said big U.S. firms, often called multinationals, have increasingly followed global growth.

“Foreign exposure allows U.S. based companies to take advantage of the growth in emerging markets like China, India and Latin America, and earn more profits than if they were solely dependent on the U.S. economy,” McKnight said. “For this reason, if you own U.S. stocks or mutual funds, you are getting considerable exposure to overseas economies.”

Companies in the S&P 500 stock index (SPX) relied on foreign sales for almost half of their revenue in 2014, McKnight said.

Among the 264 firms breaking down international results, 47.8 percent of sales came from outside of the U.S., versus 46.3 percent in 2013.

“In other words, the main U.S. stock index, which is the benchmark for the biggest mutual funds and exchange-traded funds, including SPDR S&P 500 ETF (SPY) and Vanguard 500 Index Fund (VFINX), is in fact largely global,” McKnight said.

On a fund level, McKnight said, you will not be able to determine what the overall international exposure is. Currently there are no metrics to measure this. However, she said, you can gain a good sense for overseas exposure by looking at the fund’s capitalization.

McKnight said international revenue exposure tends to vary considerably by market capitalization. For instance, for large-cap stocks (as represented by the Russell 200 Index), overseas revenues may make up more than 41 percent of total sales, McKnight said. In small caps (as represented by the Russell 2000 Index), overseas revenues represent less than 22 percent of total revenues.

Another good measure is looking at the sectors covered by the fund.

Among S&P 500 sectors, technology is the most exposed to foreign markets, which represent more than 58 percent of sales, McKnight said.

“U.S. companies in the energy, materials and health-care sectors are also substantially reliant on international business, with just over half of their sales coming from abroad,” she said.

Then, she said, look at the individual companies that are held by the mutual fund.

“Iconic U.S. companies like McDonald’s (MCD) and Coca-Cola (KO) derive a significant share of their revenues from their overseas operations,” McKnight said. ” Exxon Mobil (XOM), Intel (INTC) and Apple (AAPL) are among the companies in the S&P 500 that generate the most revenue from regions outside the U.S., according to an analysis by S&P Dow Jones Indices.”

At the upper extreme of the foreign sales spectrum is computer-chip giant Intel Corp. (INTC), which does almost 85 percent of its business outside of the U.S, McKnight said. Cosmetics seller Avon Products (AVP) has 82 percent of its sales from overseas, according to 2014 data from S&P Dow Jones Indices. In contrast, an S&P 500 sector operating close to home is the financials sector, where just 30 percent of sales are non-U.S. Outside the S&P 500, international presence decreases as you move into mid-cap and small-cap companies and funds, McKnight said.

She offered this list of S&P 500 companies with large sums of revenue from outside the U.S.

Exxon Mobile: 67.3%
Intel: 82.4%
Apple: 62.3%
General Electric: 52.9%
Boeing: 58.3%
Qualcomm: 98.6%
Phillips 66: 34.5%
Ford Motor: 42%

You should consider your the overall asset allocation you want to have for your portfolio when you look at the underlying investments in your mutual funds.

“Trying to gain exposure to foreign countries by owning stocks of U.S. multinationals is not the same as owning equity in the domestic companies of those countries,” McKnight said. “Global diversification is not as simple as investing in American multinationals. The benefits of investing directly in foreign domestic companies via international or emerging market mutual funds cannot be underestimated.”

McKnight said the stocks of U.S. multinational companies tend to be correlated with other U.S. stocks, and U.S. multinationals still derive a large percentage of their profits from the United States. The purpose of investing internationally is to diversify into areas that are not so highly correlated with the U.S. market.

Plus, McKnight said, multinationals have a greater tendency to hedge currency exposure, and one reason to invest internationally is to increase your currency diversification, not reduce it.

Also realize U.S. multinationals may not do as well as local competitors in their foreign markets because of cultural and local differences. Not everyone prefers U.S. brands, and some U.S. companies have difficulty customizing products for foreign markets.

“The U.S. share of the global stock market is declining, therefore, investing in only U.S. multinationals means missing out on different opportunities elsewhere,” McKnight said. “When you look at global GDP, you will see that the market share of these countries has room to grow.”

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This story was first posted in January 2016.