Get Familiar With Foreign Stocks

Foreign stock ownership is becoming less and less of a foreign concept in this country. Companies ranging from Sony (SNE) and Nokia (NOK) to Royal Dutch (RD) and Infosys (INFY) have made their mark far from home.

But beyond the big names, overseas stocks -- and the mutual funds that focus on them -- continue to hold some mystery. Getting past that is important, since anyone looking to build an investment portfolio using the asset allocation model is going to need some foreign stock exposure. (See last week's first two installments in the asset allocation series, on small-caps and big-caps.)

Most financial advisers recommend a foreign stock allocation for their clients' portfolios. Some recommend as much as 20%, depending on risk tolerance. And because of the constraints surrounding the purchase and sale of most individual foreign stocks (i.e., time differences, costs, etc.), most investors are far better off in mutual funds with experienced managers rather than attempting to navigate European or Asian bourses alone.

When it comes to shopping for a foreign stock fund, Morningstar analyst Bill Rocco says the same basic principles for choosing domestic funds -- strong performance history, low fees, experienced management -- apply for foreign funds.

"People surround foreign funds with a great deal of mystery," says Rocco. "But the reality is that it's no more complicated or difficult to select a foreign stock fund than it is to find a domestic stock fund."

One area of foreign funds that is often unfairly hyped is their cost. According to Morningstar, the average expense ratio for an actively managed foreign fund is 1.7%, compared with 1.5% for a domestic fund. However, Rocco says investors need not be intimidated, as there are good funds available for less than 1.5%. Take his top pick, the (TBGVX)Tweedy Browne Global Value fund, which carries an expense ratio of 1.4%.