Global Mutual Funds vs. International Mutual Funds
Have you ever come across a global mutual fund or an international mutual fund and wondered if there is a difference between the two? What about a mutual fund that says, "Asia ex Japan" or something similar? These aren't just meaningless titles put out by asset management companies - they are telling you certain things about the types of investments the fund owns. As I worked on launching the global asset management firm that will allow others to have their capital managed alongside my own family's money, it occurred to me that many new investors might not know these basic concepts. That bothers me because they are important.
By walking you through them, I hope to empower you to find the sort of holdings that will let you sleep well at night, knowing exactly what it is you own and fully comprehending the risks and probability of those risks materializing. You wouldn't believe how many people I see who buy things like leveraged ETFs and have no idea of the dangers to which they have exposed themselves and, in many cases, their family. For the sake of intellectual curiosity, I recently test drove an automated online adviser only to discover, in horror, it recommend an asset allocation that involved ordinary investors buying foreign bonds issued by sovereign governments in third world countries! It's totally unnecessary to building wealth. Furthermore, as the person primarily responsible for your money, there's no excuse for pleading ignorance in the information age. If you're like most people, the odds are good you worked hard for your money. Your job is to protect it first and foremost.
What Is In a Mutual Fund Name? It Turns Out, A Lot, Actually. Global and International Mutual Funds Give You an Idea of the Scope of the Geographic Mandate
Several years ago, the Securities and Exchange Commission, or SEC, passed a rule that requires mutual funds to invest 80% or more of the fund assets into securities that are compatible with the fund name. For example, the XYZ Long-Term Bond Fund would need to keep at least 80% of the fund's assets in long-term bonds or it would be in violation of this rule. That means no matter how inexpensive the stock market looked or how risky management believed long-term bonds were at any given time, management would still be required to park the money in long-term bonds. Likewise, the ABC Utility Stock Fund would need to keep 80% of its assets invested in utility stocks.
What, then, is the precise difference between a global mutual fund and an international mutual fund?
- A global mutual fund invests in assets around the world including the home country.
- An international mutual fund invests in assets around the world excluding the home country.
- An "ex [insert country name here]" mutual fund invests in a region excluding the area after the "ex". For example, a fund that is called something like "XYZ Asian Stock Fund ex. Japan" would have to invest at least 80% in Asian stocks excluding Japanese stocks.
One lesson to take away from this is the name of your mutual fund really does matter. It has to line up with the fund's investment mandate.
Personally and professionally, I believe this is a major improvement over the past because inexperienced investors who pick a fund for its name, say a "dividend fund", now at least have the basic guarantee that they are getting something close to reality. As it relates to this topic, it also means you shouldn't find yourself owning an international fund that actually has half of its money invested in the United States and could more accurately be called a global fund or worldwide fund.
Even with the naming convention changes for funds, it is still absolutely vital that you take the time to read the mutual fund prospectus, which is the document breaking out the risks and strategies used by the portfolio manager to select investments. It also gives you information on the fund expense ratio, which is really important to your success as a mutual fund investor. Additionally, you'll want to take a look at the underlying portfolio of the mutual fund in the annual report.