While examining historical data is interesting, the real of test of international di-
versification is the performance of funds that hold internationally diversified portfo-
lios. Exhibit 11.14 shows data for 20 of the largest international mutual funds (funds
that invest only in international securities) that existed in the 1990s together with data
on the Standard & Poor’s (S&P) index.
Exhibit 11.14 shows data for a random sample of 20 international funds (funds
that invest only in international securities) that existed in the 1990s together with data
on the S&P index.
The major promise of international diversification is the low correlation between
domestic securities and foreign securities. As shown in Exhibit 11.14, the average
correlation between the fund return and the S&P index was 0.61. These correlations
are somewhat higher than the correlations between the international stock indexes
and the U.S. indexes presented in Exhibit 11.3.
Correlations this low would never be found for a U.S. mutual fund investing pri-
marily in common stock. Rather, the average correlation with the S&P index would
be above 0.90. This is strong evidence that the extensive analysis discussed earlier
concerning low correlation among countries can be reflected in actual performance
of international mutual funds. Similarly, the column entitled “Beta” shows the re-
sponsiveness of international funds to a change in the S&P index. The Beta for the
common stock portion of a fund invested in U.S. securities would be close to one.
11.8 OTHER EVIDENCE ON INTERNATIONALLY DIVERSIFIED PORTFOLIOS 11 • 191990–1999
Mean Correlation
Return Standard with
Monthly Deviation Beta MarketCanada General Fund 1.05 4.27 0.92 0.93
Keystone International Fund 0.76 3.96 0.58 0.63
Japan Fund 0.76 7.08 0.41 0.25
Scudder International Fund 1.12 4.30 0.62 0.62
G.T. Pacific Fund 0.23 6.52 0.81 0.53
Alliance International Fund/A 0.65 4.55 0.66 0.62
Templeton Foreign Fund 0.98 3.88 0.60 0.66
T. Rowe Price International Stock Fund 1.00 4.30 0.63 0.64
Fidelity Overseas Fund 0.97 4.36 0.64 0.63
Vanguard World—International Growth 0.89 4.40 0.61 0.60
Managers Funds: International 1.06 3.68 0.56 0.66
Morgan Stanley Instl. Fund—International Eq. 1.12 3.93 0.53 0.58
Warburg Pincus International Equity 1.09 4.72 0.64 0.59
G.T. Global Growth—Europe Growth 0.78 4.90 0.71 0.62
T. Rowe Price International Discovery 1.17 5.41 0.54 0.43
Schroder Captial Funds: International 0.84 4.24 0.56 0.57
Smith Barney World Funds International 1.19 4.86 0.72 0.64
Thompson McKinnon Invest Trust Global 0.84 4.67 0.76 0.71
Fidelity International Growth and Income 1.01 4.05 0.58 0.62
Ivy Fund International 1.03 4.40 0.67 0.66
Average 0.93 4.62 0.64 0.61
S&P 1.48 3.58 1.00 1.00
Exhibit 11.14. Performance Data on Stock Funds.