BOSTON (TheStreet) -- Count Robert Lutts, president and chief investment officer of Boston-based Cabot Money Management, among those who think smart investors looking overseas can do better than the market-basket approach of international ETFs.
"I think the brokers are starting to grow and put more emphasis in these areas," he says. "But you still have to be careful."
China's health care sector is ripe for individual investment, an adviser says, but the possibility should still be approached with caution.
Lutts' advice for cracking into into international markets on a stock-by-stock basis is to "use a very well-recognized, large broker that has a top foreign desk." Expertise and competitive commissions need to be a consideration, he says.
In a significant sign of falling borders, customer demand has prompted
to offer more options to investors looking for opportunities in foreign securities and currency trading.
Last October, as a supplement to its trading capabilities with roughly 45 foreign markets, Fidelity launched an
for retail investors with direct trading access to 12 countries.
As part of this enhanced capability, the firm has added real-time data, third-party research and charting functionality similar to what would be available for domestic securities. Traders have the option of settling in U.S. dollars or the foreign currency, and all trades are reviewed instantly for regulator compliance before being transmitted.
"Trade activity is still relatively light compared to our domestic trading, obviously, but you definitely see more interest, month over month, with customers trying to find out what they can do and what markets they have access to," says Gregg Murphy, who oversees Fidelity's retail stocks and options trading.
The dozen countries offered via Fidelity's online trading desk are Australia, Belgium, Canada, France, Germany, Hong Kong, Italy, Japan, Netherlands, Norway, Portugal and the U.K. Developed markets were chosen over emerging markets such as China and Brazil because of the added volatility and regulatory issues, complexities that make them less than ideal for a streamlined, online approach.
Though many customers do, nevertheless, inquire about emerging and frontier markets, our neighbors to the north dominate actual trading.
"Due to proximity and customer awareness, Canada always has a pretty strong following," Murphy says, noting mining and natural resource companies as popular plays. "You get customers who subscribe to Canadian investing newsletters so they get a lot more information on Canadian securities than they might some other foreign markets. Right now you also see a lot of interest in Australia, because of how their currency is doing."
"You definitely need to know what you are doing," Murphy adds. "We definitely try to make sure that people have all the facts before they make a trade. You need that real-time market data, and you need all the research you can get you hands on."
Margret Trilli, managing director of global investing for
, cautions that international investing has more risk and requires far more due diligence.
"One of the things that shocks me, even to this day, is that even some of our sophisticated investors don't understand currency risk," she says. "You always have that currency risk."
It's easy to see why performance on its own can be seductive.
Lutts, who visits China several times a year, is particularly bullish on the opportunities that nation's health care sector offers those who want to lay their money directly into individual foreign securities.
"Of all the sectors over there that I cover, health care is one of the most dynamic and exciting," he says. "You have a very low base you are coming from. There is about $100 per capita spending today in china annually on health care, versus $7,000 in a developed economy like the United States. It is like investing in
Johnson & Johnson
back in the 1930s. The companies we are finding are in the medical equipment space, cancer treatment and drug distribution. They are all growing at about 20% to 30% annually, and I think that is going to keep up for many years."
The rise in Internet use among the Chinese, he says, has given rise to consumer demand, educating the populace to treatments and technology that once either lacked demand or were unheard of.
Among his recommendations for getting in on the action are such companies trading on the Hong Kong exchange as drug distributor
and medical equipment maker
But basing a decision solely on company performance isn't adequate. The performance of a foreign currency compared with domestic dollars can erase any gains made from a stock's positive performance, Trilli says. An outperforming currency can also mask a company that is performing poorly.
"You also have to look at your time horizon and see if there are any elections or changes of control that are going to be happening to the economy and might affect you, either positively or negatively, in terms of how stocks might fare," she says.
Research is critical.
"Just like any other investment you might make, it is never a good idea to go with just one source," Trilli says. "The challenge is that the information isn't as readily available and it's not covered as widely in the media. Many broker dealers don't cover any international topics at all. They don't cover country profiles and they don't cover currencies."
Over time, she sees customer demand driving better information offerings.
"With the advances in technology and how mainstream this market is becoming, I see that gap closing, certainly over the next five years, and that is going to diminish as a risk," she says.
But what we might view as illegal or unethical is treated as merely regulatory wiggle room in some countries -- "You can't expect all the same accounting rules, or all the same reporting rigor that you can get in the U.S.," Trilli cautions -- a there is no easy fix for the fact a foreign regulatory environment can be "sometimes just not that friendly for U.S. Investors."
"The changes in leadership and control at the country level can affect how favorably you are taxed or whether or not you can participate in dividends and certain corporate actions," Trilli says.
Limitations on what shares are available to foreign investors and how much they can buy are also a factor in some countries. Additional levies on international trades may also be a factor.
Even with risk factored in, "the performance can be really strong" in developed markets such as Europe, Japan and Hong Kong.
"Your growth is going to come from outside U.S. Borders," she says. "The U.S used to be 70% of the world market cap. It is now between 30% and 40%. It is just a different world, and the investment universe has to be beyond our borders."
Still, don't count out just yet the need to consider ETFs for international needs.
India, for example, doesn't allow direct foreign investment, making an ETF the best way to gain access. Russia is another country "almost impossible" for individuals to crack into, Trilli says. Brazil and China also have regulatory restrictions that can make an ETF a more efficient option.
"The countries we've highlighted for a long time as the largest emerging-market countries, and where people are projecting the most growth, are some of the most difficult to gain access to as an individual investor," she says. "That is where the ETFs come in."
-- Written by Joe Mont in Boston.
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