Not Foreign Enough?

Stocks outside the U.S. are widely seen as strong in long-term growth potential, but one group of popular mutual funds may be keeping investors too close to home. Target-date funds, which automatically move to a more-conservative mix of stocks and bonds over time, act as one-stop shops for 401(k) and other retirement-oriented investors. But these diversified offerings have been chastised for being too light on stocks, given the multidecade horizons of their investors. Fund companies have since boosted the stock position of these funds -- including the international portion -- but some funds still are exploring less of the globe than other investments.

Vanguard Group's target-date funds, for example, keep 20% of their stock allocation outside the U.S. Meanwhile, Fidelity Investments and T. Rowe Price Group Inc. stay closer to 25%. Other firms ratchet international exposure higher: Putnam Investments, now owned by Power Financial Corp.'s Great-West Lifeco Inc., for instance, is around 30%, and AllianceBernstein Holding LP tips the scale above 35%.

International Flights

Some target-date funds could be more intrepid, says Greg Carlson, a fund analyst at investment researcher Morningstar Inc. "For a longer-term perspective such as most of these funds are taking," he says, "one could justify a larger allocation to international."

Indeed, about half of the world's total stock-market value is outside the U.S., but putting 50% of a portfolio abroad would stretch the comfort level of even seasoned investors.

"There's no question that there's a significant diversification benefit to international investing," says John Ameriks, a principal in Vanguard's investment counseling and research group. "As a baseline, we think 20% gets you the largest part of that benefit."

But if 20% in non-U.S. stocks is good, some researchers say more is better.

A 30% Recommendation

"If you are a long-term investor, we suggest that about 30% of your equity allocation be in international equity," says Michele Gambera, chief economist at data firm Ibbotson Associates, a unit of Morningstar.

With such divergent views, it's not surprising that target-date funds' international makeup also varies. Vanguard's target-date funds, with a relatively low allocation to international stocks, maintain a noticeable footprint in riskier developing regions. About 2% to 3% of the stock portfolios is invested in its Emerging Markets Stock Index fund and around 5% in its Pacific Stock Index fund. Another 8% to 10% is given to its European Stock Index fund.

Fidelity's target-date funds include five international products: about 4% to 5% each in its Europe Fund, Overseas Fund and Diversified International Fund, with a smattering in its Japan Fund and Southeast Asia Fund.

At T. Rowe Price, target-date investors get non-U.S. exposure through the firm's Overseas Stock Fund, International Stock Fund, and International Growth & Income Fund. Emerging-markets exposure is being added to target-date funds, says Jerome Clark, manager of the portfolios.

International investing has been profitable, especially with the weaker U.S. dollar enhancing results for Americans. Markets outside of the U.S. returned an average of 23% a year in dollar terms over three years through September, and emerging markets returned 37%, according to index tracker MSCI.

By contrast, U.S.-based companies in the Standard & Poor's 500 Index gained 13% over that period.