One on One: "So far this year, our international iShares product assets have grown 130%"

The traders in New York who throw phones at computer screens like to think they are Masters of the Universe. Yet in a quieter San Francisco office looking toward Oakland, Feng Ding could make similar claims.

As senior portfolio manager in the international equity portfolio management group and head of the iShares team, Ms. Ding oversees all the international portfolios in Barclays Global Investors’ exchange-traded funds.

It is a big job. Of the company’s 81 ETFs, 33 of them are under her management.

And Ms. Ding is just 28 years old.

But she tempered her steel under extreme heat.

“Feng is cool under pressure, having cut her teeth with BGI in managing our institutional emerging-markets index funds during the Asian financial crisis,” says Steven Schoenfeld, the managing director in charge of international equity product strategy. “What distinguishes her the most is the combination of her deep analytical capability and her strong practical experience in global equity and currency markets.”

That combination is good news for retail-oriented advisers, who account for the distribution of about 45% of all international iShares. The retail participation has helped drive BGI’s international iShares assets up 130% in 2002 to $6.8 billion, from $3 billion. Overall, iShares assets have risen 60% to $28.7 billion, from $17.5 billion.

Performance, though, has been uneven. BGI’s top-performing international ETF, iShares South Korea Index Fund, was up 20.61% year-to-date as of July 31, compared with a 24.53% gain for the Korea Fund. And its worst performer, iShares MSCI Brazil Index Fund, was down 44.15%, compared with a 33.10% decline for the Brazil Fund.

Q During the U.S. bull market’s run, it was popular to say that international investing was irrelevant, because of the global economy. In other words, I could get all the international exposure I need by investing in Caterpillar and Coca-Cola? Is that thinking flawed?

A We definitely believe there are benefits to going to get that direct international exposure. How else do you participate in both the local economic growth and the local capital market growth, which might be subject to a different set of supply-demands than the U.S.?

Another side of that is that the [Standard & Poor’s 500 stock index] just dropped its seven international names, including Unilever, Royal Dutch [Petroleum] and Nortel.

Q What should an adviser’s international investing strategy be, given that an S&P 500 fund of multinationals doesn’t provide proper international exposure?

A Whatever is the cheapest way to get broad-based international exposure should be what investors should consider as their core investment vehicle for international investing. In most cases, ETFs are the answer. And then either add on individual-security exposure or individual-manager exposure to round out their international portfolios.

Q How involved are independent financial advisers in international investing through ETFs?

A ETFs’ two intermediary channels are the registered-investment-adviser channel and the broker-dealer channel. We have lower percentages coming out of the broker-dealer channel. At around 5% to 10%, they are [allocating] less than the adviser channels.

Q How much higher an allocation do advisers have than brokers?

A We have found the advisers to be in between the broker-dealer channel and institutional investors who range between 10% and 20%. RIAs typically allocate around 10% to 15% to international markets.

Q Is that a static allocation, or are more individuals investing internationally?

A Looking at the past decade, there has been definitely an increasing awareness of international investing. So far this year, our international iShares product assets have grown 130%. Market factors help. This year, international markets have outperformed the U.S. market. Emerging markets have outperformed developed markets, and foreign currencies have outperformed U.S. dollars. All those are factors that cause people to take another look and question their investment styles and see if they should have a portion of their assets in international markets.

Q Would you recommend that financial advisers keep a higher percentage of their assets in international assets than what you currently see?

A The efficient-frontier theory shows that international allocation of anywhere from 20% to 40% will be the allocation to result in your portfolio risking the least. The world’s total market capitalization is about half in the U.S. and half in international markets. If you look at it from a retail investor’s perspective, and your income stream and expense stream are mainly U.S. based and U.S. dollar based, then that argues against allocating more than half your assets internationally.

Q So advisers should actually double their international exposure to keep returns optimally stable?

A Examine the history of the U.S. equity market’s performance and international equity markets’ performance.

There is a point on the efficient frontier where when you add more international exposure, it adds to your risk. But if you’re not to that point, then adding more international would likely lower your overall portfolio risk.

Q How much less does it cost me to buy a portfolio of iShares versus going out and doing it out on my own through stock purchases?

A If someone is looking to do international investing, there are several ways that they can do that.

They can construct a portfolio of American depositary receipts.

They can go buy open-ended or closed-end mutual funds.

Or they can buy exchange-traded funds.

The ADR solution is very imperfect because of lack of coverage. It depends on the countries and the sector.

For example, Asia has much less ADR coverage overall than Latin America, which traditionally relies more on U.S. capital flows. Therefore, using ADRs can achieve only very spotty Asian exposure.

So that leaves the choice of professionally managed funds – open- and closed-ended mutual funds, and exchange-traded funds.

Exchange-traded funds typically have lower expense ratios because they are index funds, and they are more tax efficient.

As For example, with our emerging-market exchange-traded-fund family, expense ratios average between [0.84 and 0.99 percentage] points.

If you were to look at closed-ended and open-ended funds listed on Morningstar, the expenses range from [1.5 to 2 percentage] points.

Q Are there other cost, expense or performance arguments to be made in favor of international iShares?

A The closed-end-funds industry has had a difficult time addressing significant premiums and discounts. International funds have traditionally traded at larger discounts. It ranges from a 10% to a 40% discount, depending on market and investor sentiment.

Q Is it difficult to create international iShares that meet or beat the alternatives?

A It is difficult to construct portfolios that track international index benchmarks. The holdings have to be accessible and easy to trade.

Q International investing looks good, partly because the U.S. market stinks. Is there a reason to believe that international investing will continue to be attractive?

A We are currently in a period of relative outperformance for international equities and currencies.

They will probably have a little bit of run in relative space, but how they will do in absolute space – who is to say? A lot of foreign economies have significant exposure to the U.S. market.

On the other hand, structural changes in local markets, such as removal of investment restrictions, have had a positive impact on foreign capital markets.

Q What about Japan or any select companies that people should watch?

A I don’t know where the Japanese market will go. It has been at depressed levels for a long time.

One of my worries is that their banking problems haven’t been addressed in a fundamental or structural way.

SNAPSHOT

Feng Ding, 28, senior portfolio manager in the international equity portfolio management group at Barclays Global Investors in San Francisco, and head of the international iShares team

Career: 1998-2000, senior portfolio manager, Barclays Global emerging-markets portfolios; 1997-98, trader, international equity programs/derivatives in London with J.P. Morgan Investment Management Inc.; 1995-97, analyst, U.S. structured equity in New York with J.P. Morgan Investment Management

Education: bachelor’s degree in economics from Bowdoin College, 1995