International Portfolio Diversification

International Portfolio Diversification Paper

Globalization is a result of foreign trade and investment worldwide. Individual investor's mainly invest in a foreign portfolio investment (or foreign indirect investment) which is "the investment by individuals, firms, or public bodies (e.g., governments or nonprofit organizations) in foreign financial instruments such as government bonds, corporate bonds, mutual funds, and foreign stocks" (Shenkar & Luo, 2004, p. 53). Portfolio investments must be diversified to minimize risk and should be a combination of local and foreign investment techniques, scenarios, and equities. The purpose of this action is to minimize loss of finances and to be diversified across the board. Rarely is it that all sectors within a given market do not perform to provide an investor some type of gain when diversified in local and foreign equities. Therefore, diversification is advantageous and beneficial to the individual and group investors. The rest of this paper will explain some of the pros and benefits of international portfolio diversification and discuss three different global funds that have used the concept of international portfolio diversification for success.

The Benefits of International Diversification

There are several benefits to international investing; one of them is having the opportunity to invest in more diverse portfolio versus what is offered in a local market portfolio. The biggest advantage is that with international portfolio diversification the investors often reaps a better risk to return than by investing solely in U.S. or local securities (Shapiro, 2005, p. 411). In other words, "The broader the diversification, the more stable the returns and the more diffuse the risks" (Shapiro, 2005, p. 411).

The second advantage of international diversification is the fact investment in different international markets can reduce investment risks significantly. This is due to the fact that the low correlation between the economies of different countries worldwide can offer the investor some safety in the event that domestic or regional economic factors affect all or most of the industries in the market. More specifically, an internationally diversified portfolio is less than half as risky as a fully diversified U.S. portfolio (Shapiro, 2005, p. 414). A third benefit of international diversification the increase in returns resulting from investing in foreign markets that may have higher yields than the local market. Therefore, it is said that international diversification pushes out the efficient frontier which means that the set of portfolios that has the smallest possible standard deviation for its level of expected return and has the maximum expected return for a given level of risk; thus, allowing investors simultaneously to reduce their risk and increase their expected return (Shapiro, 2005, p. 415).

Global Funds Success

There are a number of different global funds that have been using the concept of international portfolio diversification to successfully invest for many years. Nevertheless, three distinct global funds were able to maintain this success in very difficult times, and they are as follows:

* American Funds Capital World Growth &