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Investing Insights: Retiring Overseas, Robo-Advice, REITs

Our analysts discuss mid-value fund investing, carbon risk, and short-term bonds on this week's episode.

Editor's note: We are presenting Morningstar's Investing Insights podcast here. You can subscribe for free on iTunes.


Christine Benz: Hi, I'm Christine Benz for What do you need to know before buying property overseas? Joining me to discuss that question is Ilyce Glink. She is CEO of Best Money Moves, and she is also author of a new book, 100 Questions Every First-Time Home Buyer Should Ask.

Ilyce, thank you so much for being here.

Ilyce Glink: Sure.

Benz: I wanted to talk about the topic of investing in property overseas. I think many of us have probably walked past the real estate offices in foreign countries and peeked in the window and thought about what it would be like to own a home overseas. I wanted to talk a little bit about the financial implications of that. Let's talk about the potential positives of buying some sort of property overseas.

Glink: A lot of people have figured out it's a lot less expensive to retire in other countries, countries where you might have healthcare paid for in part or it's much less expensive from the government, or places where property prices are less, you could get waterfront property for a fraction of what you might be able to get here, and where there's just a different feel, ambience and culture. I f you want to live in Provence, I mean, what's bad about that?

Benz: Who doesn't? Yeah.

Glink: Who doesn't? That's really great. There's lots of wonderful things to explore around the world. Americans have moved all over the world to retire.

Benz: There are some quality of life considerations, but it's complicated, right? There can be drawbacks. Let's talk about some of the financial things that someone should think through before pulling the trigger on an overseas property.

Glink: First and foremost, how easy is it going to be for you to qualify or get financing to buy that property or do you have to have all the cash upfront?

Benz: I have to get my mortgage in that country where I'm buying the place? Is that how it works?

Glink: You may have to do that. Or you might be able--let's say, your house here is all paid off, you may be able to get a home equity loan, a refinance, do a cash-out refi here, and then you've got cash that you can take to get over there. In some countries, like in France, I understand that it's relatively simple. It's a mortgage market that's very similar to the U.S. Down in Latin America, not as much. Up in Canada, they are going to require maybe 20%, maybe more, plus there's other issues with Canada that they have layered on like a foreign buyer tax. Down in Australia and New Zealand, they are now limiting the number of foreigners, and they have also taxed the people who can come in. You have to ask yourself, am I thinking about moving to a country where the government wants me, and my dollars, or really they've decided, no, they are not that interested, because the amount of extra cash, extra fees, extra taxes that you will have to pay for could be significant.

Benz: How about the U.S. tax implications? Say, I continue to be a U.S. taxpayer even though I own this property overseas, what will be the tax impact for me as a person filing in the U.S.?

Glink: Part of that is where are you going to make your primary residence, and are you going to live abroad. Then you are going to have to follow tax law for there but also declare back here? Are you just investing in the property--you are going to rent it out? There are specific tax laws, and the new tax law, I think, is going to have an effect on that as well, where if you sell the property and you make money on it, declaring that and being able to be upfront with the U.S. government is another thing you are going to have to think about.

One thing I would warn people is that the world works in different ways around when it comes to real estate. While there are wonderful U.S. brokerage companies like Century 21 and Coldwell Banker that are available at Sotheby's, you know, they are available in these other countries, that really helps because you get a U.S. introduction …

Benz: A support system to some extent.

Glink: Support system, certainly, a support system--and they may become your best friends--but there's a familiarity to working with a U.S.-based company that's abroad that's used to all of those rules and regulations and can walk you through them so that you don't trip up on something along the way.

Benz: Another dynamic I would have to consider is what's going on with currency fluctuations relative to my dollars. If I'm buying this place in dollars, how does the foreign currency fluctuation potentially affect my purchase?

Glink: What happens, you won't buy your property in dollars if you are buying in France, right? You are going to buy in French francs or you are going to buy in a Canadian dollar. Whatever it is, wherever you are, they have their own currencies. Currency fluctuations are important because you are going to pay in the local currency, so whatever the transfer is on that date. You may also have to transfer money into a local bank ahead of time. They may want to see 30% or 40% of the purchase price since you are coming from out of the country, that may be a condition of sale. You will need to take that cash, whether you are cashing out investments or you have cash in the bank, and move that into that country, which is fine in some countries. In some countries, you might be a little more worried about having cash in a local account and what that really means. 

Thinking of currency devaluations in Latin America, for example and what that might mean to the purchase price of your property if you have already transferred into the local currency and then something happens. And so, understanding what the looks like, what strategies there are to hedge that problem and how to find partners that you can trust in the area where you are going, that's an important, big step.

Benz: Obviously, a lot of moving parts here, more complicated than a domestic real estate purchase. Do you have any--and I know you have written about this topic--are there any resources that you can recommend for people who are attempting to get their arms around making smart decisions on this front?

Glink: I would read books by the people or go to their websites, the people who have actually written about a lot their moves to Latin America …

Benz: Or wherever.

Glink: Or wherever they have moved. They talk about how great and easy it is to move to Guatemala. But you know what, a couple of years ago I was in Guatemala, and just recently the volcano that I was 50 miles from exploded all over the place. You want to be very careful and cautious.

The first thing I would say is, read about those areas. Go visit those areas? It's one thing to say I'm going to retire in Panama and then you get there, and you realize that for whatever reason the healthcare system won't work for you. If you are going to spend more than six months a year, you really want to understand it.

There's a couple from Chicago, she used to be one of the chief librarians at the Newberry Library and he was a professor, and they moved to Oaxaca, Mexico. They spoke fluent Spanish. They had spent years of their life going there and being a part of it. They had friends in the area. They knew what the healthcare was going to be. They had a way to ease in. They were still doing some work locally before they finally retired there; they are in their 80s now. We visited them a couple of years ago, they have had a very successful transition.

Benz: They were ideal candidates for this in really every way?

Glink: Ideal candidates and it worked well for them. Then when one of them got sick, they had a backup and the resources, knew where they needed to go, spoke the language, had the insurance, were able to get the treatment they needed and so, it's worked out really well for them. I think that that's a great example of just an easy way in. The idea that you are going to buy a chateau in Provence, you know, sounds like a dream and then you have to make all of those pieces work.

Benz: Ilyce, great to get your insights. This is such an interesting topic. Thank you so much for being here.

Glink: Sure.

Benz: Thanks for watching. I'm Christine Benz for


Christine Benz: Hi, I'm Christine Benz for What are the implications of rising bond yields for bond mutual funds? Joining me to discuss that topic is Russ Kinnel. He is director of manager research for Morningstar.

Russ, thank you so much for being here.

Russ Kinnel: Glad to be here.

Benz: Russ, this is something that appeared in the latest issue of Morningstar FundInvestor, where you and the team looked at what's been going on with bond fund yields. But before we get into that, let's discuss how investors should navigate some of these yield statistics that they see. We've got 12-month yield on the site as well as SEC yield. Which of these numbers should they be paying attention to?

Kinnel: Maybe the SEC yields. The SEC yield is a 30-day yield; the 12-month field tells you what the fund distributed over the trailing 12 months. When interest rates change a lot, the 30-day is going to be a better guide. It's got its own quirks, but it's at least going to reflect the current market a little better than the 12-month yield.

Benz: The SEC yield is sort of a near-term snapshot?

Kinnel: That's right.

Benz: And that's an annualized figure?

Kinnel: Yes.

Benz: Let's talk about, as yields have come up over the past couple of years, let's talk about some of the categories that have experienced the biggest increases in their yields, because they are pretty meaningful.

Kinnel: Somewhat surprisingly, it's the short end of the curve that's gone up the most. We are seeing the yields have really grown in short-term Treasury funds, short-term bond funds, and some others, intermediate funds as well. It's really the short end, the area we've kind of all tuned out recently because there wasn't any yield. Who really cared about short-term bond funds or ultrashort funds or money market, there was no yield. Now, there is yield.

Benz: The intermediate and longer-term funds haven't participated as much. I know that there are a lot of moving parts that affect bond yields. But what do you think is going on there?

Kinnel: It often happens when you see the market start to think that inflation is rising, and there might be recession looming out there that the gap between the short end and the long term declines. So we are getting a flattening of the yield curve. It hasn't quite inverted yet as we are speaking but it's not too far off.

Benz: In terms of the yield increases that we have seen on some of these products, you referenced that short-term bond funds have seen a nice pop up in their yields. What are we talking about?

Kinnel: If you look versus a couple of years ago when short-term bond fund yields were somewhere between 50 and 100 basis points, now they're mostly between 200 and 250 basis points, so a significant pop. Of course, that means you've also got some modest losses in there, because that's what happens when bonds adjust is they sell off to produce that higher yield. You'd have some modest losses, only about 100 basis points for the most part, but a pretty significant hike in yield.

Benz: Your point is that for investors who had just been saying, I'm going to hunker down in cash, I'm not really getting paid to take bond risk--today maybe you are?

Kinnel: For sure. And I think people went both ways. Really, they went into cash, but they also went into longer-term bond funds and into high-yields because they actually had yield. Now these gradations are back, in that short-term bond funds are worth looking at again because they do have meaningful yields and there's some logical place in your plan for a short-term bond fund.

Benz: You might have, though, some near-term losses as investors in these funds have experienced very recently. How should investors think about that? Should they kind of use their time horizon to guide what sort of product they are in?

Kinnel: Most definitely. You see these short-term bond funds took like a 1% loss, and that's usually about the worst they do unless they are taking some big credit risk or something. Obviously, that gives you some idea of how to use them that they're not your first line of defense. If you've got kids' tuition coming in a couple of months or something, that should be in something like a money market, a bank savings account, something where you don't have to worry about the principle going out, but then it can be right after that, as your next line of defense. A short-term bond fund shouldn't lose very much, especially if you have, say, a short-term Treasury fund. And then after that would be intermediate funds and others that have some more risk and could lose a more meaningful amount.

Benz: Russ, great to get your insights. Thank you so much for being here.

Kinnel: You're welcome.

Benz: Thanks for watching. I'm Christine Benz for


Katie Reichart: Growth funds have been on fire in recent years as tech stocks have posted huge gains. Small-, mid-, and large-growth are among the best performing Morningstar equity fund categories not only in 2018, but also over the past five years.

On the flip side, value funds have turned in weaker returns. Mid-value funds in particular have gained just 2.8% for the year to date through July compared to double-digit gains for small- and large-growth funds.

Investing in a mid-value fund in this growth-fueled market is a bit of a contrarian play and could round out a portfolio. Some top mid-value funds rated highly by Morningstar, including T. Rowe Price Mid Cap Value and Diamond Hill Small-Mid Cap, are closed to new investors, but other notable, open choices remain. 

Harbor Mid Cap Value is subadvised by LSV Asset Management, whose quantitative approach has a long, successful history. Hotchkis & Wiley Mid-Cap Value is a true-blue deep-value fund that isn’t for the faint of heart, but it's stuck to its approach and has reaped big rewards in up markets. Vanguard Selected Value relies on three subadvisors who ply complementary approaches at a reasonable price. Indexing fans may also consider Vanguard Mid-Cap Value Index, which has rock-bottom fees.


Kevin Brown: With a requirement to pay out 90% of their net income as a dividend, REITs are highly sought after investments for income-oriented investors. However, dividend yields are quite variable across the sector, so finding an attractive investment with a high, safe dividend combined with the potential for outperforming the market presents a unique challenge. We want to highlight some large-cap REITs that provide both a high yield and the potential for positive returns.

First, we like the big three healthcare REITS: HCP, Ventas, and Welltower. All three are currently providing dividend yields in the mid-5s and are trading below our fair value estimates for the companies. Dividends for all three companies are well covered by current cash flows, they have an established history of raising their dividend each year, and even during the uncertainty of the great financial crisis they maintained or raised their dividend. 

The healthcare REITs have traded off in 2018 due to supply issues impacting senior housing operations in the short term, but there is evidence that supply is decreasing, and we expect there to be a significant demand wave positively impacting the sector over the next decade. We believe these companies will outperform as this supply-demand imbalance corrects. Of these names, we like Welltower the best.

We also like two retail REITS for income-oriented investors: shopping center REIT Kimco and mall REIT Macerich. Kimco is currently paying a U.S.-REIT-leading dividend in the high 6s, and Macerich is paying a dividend in the mid-5s. Again, dividends for these companies are well covered by current cash flows, and they regularly increase dividends to match cash flow increases. Retail REITs are oversold over fears of e-commerce growth impacting results, but their Class A properties should be relatively insulated as there will always be demand for high-quality retail. Of these names, we like Macerich the best.

In summary, there are several REITs that income-oriented investors should keep an eye on for both high dividend payouts and potential capital gains.


Michael Wong: In 2015, positive sentiment toward robo-advisors was about at its peak with predictions of them disrupting the traditional wealth management industry. However, at that time we wrote a report titled "Hungry Robo-Advisors Are Eyeing Wealth Management Assets," taking the opposite view, stating that the economic moats of established financial institutions would keep them safe. Additionally, we opined that due to the high cost of client acquisition and low profitability of robo-advisors that many of them would go out of business or be acquired.

Our negative view on them largely played out. Currently, all signs point to the largest, standalone robo-advisors being unprofitable; multiple robo-advisors have chosen to sell themselves, likely due to their uncertain future; and the established investment service firms are still going strong. In fact, some of them have developed digital advice services in the last several years that have gathered more assets than the standalone robo-advisors that have been around for about a decade. With all that said, the pendulum of market sentiment has likely swung too far to the negative side.

We recently updated our thoughts on robo-advisors, writing a report titled, "Robo-Advisor Upgrade: Installing a Program for Profitability," and now believe that select robo-advisors have a good chance of becoming profitable after having evolved their business model during the previous several years. Three key areas of weakness that they've come to address include: one, lowering the cost of client acquisition, such as through third party partnering and creating lead generation products; two, creating a high operating leverage business model even if they go the hybrid route and have human advisors on staff; and three, increasing their revenue yield on client assets through cross selling additional services or using proprietary products in their portfolios. It's the third factor of increasing revenue yield on client assets that is the main driver of us becoming more positive on the space, as it was their original business model with many of them having a 25-basis-point revenue yield that made us negative on them.

At the moment, we believe that some investment service firms like Credit Suisse, UBS, Invesco, and BlackRock are trading at attractive valuations and that they will continue to thrive despite the growth of robo-advisors and digital advice. Additionally, both of the robo-advisor special reports that I mentioned are currently available on the Morningstar blog and corporate site.


Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm joined today by Jon Hale. He is our director of sustainable investing research. We're going to talk a little bit about the Carbon Risk Score and how investors can use it.

Jon, thanks for joining me.

Jon Hale: Thank you.

Glaser: Let's talk a little bit about the Carbon Risk Score that we rolled out a couple of months ago now. Can you describe exactly what this is and what it's measuring for mutual funds?

Hale: The Carbon Risk Score is a new metric that is based on underlying information from Sustainalytics, our ESG data provider, that is trying to assess a company's risk in relationship to the transition to a low carbon economy. It primarily focuses on carbon emissions in a company's operations and in its products and tries to assess what kind of financial risk does this company face in a transition that would cause them to have to reduce emissions significantly.

Glaser: How is this different from our Sustainability Rating, the globe rating, which we've had for a couple of years now?

Hale: There is a relationship between them, but they are distinct in a couple of ways. Carbon risk obviously focuses on this one broad set of issues related to global warming and climate change. The ESG, the sustainability ratings overall focus on a broader, more holistic assessment of various ESG--environmental, social, corporate governance--issues that are material to any particular company within its particular industry.

The Sustainability Rating is also relative. It's relative at the company level--who is doing the best at managing ESG risks and opportunities within an industry--and also, at the fund level--who is doing the best at the category level on the sustainability ratings. The carbon risk rating is an absolute measure. You can compare a company's rating across the entire economy and you can do the same with funds.

Glaser: What is the relationship then between the two if they are related? Do we see a lot of 5-globe funds that have pretty poor carbon risk scores?

Hale: There's some relationship between the two actually. I was just looking at our large-cap blend category, thinking about how you would use these measures to help you identify a core U.S. stock holding. About 100 out of 500 funds in the large-cap blend category get a low carbon designation, meaning, on average, their portfolios have low carbon risk. About 60% of those have 4 or 5-globe ratings. There is definitely an overlap, but it's not complete. In the value category, there's very few funds that have low carbon designations because, based on the kinds of companies that a typical value fund would invest in, they are going to have a fair amount of carbon risk. You can assess value funds based on that measure, but if you look at the overall sustainability rating, you are always going to find within a category that the top 10% get the top rating.

Glaser: If you are an investor then, and let's say you care about global warming or reducing your global warming risk, climate change risk, but you also care about some of the other ESG factors, how do you combine these two when making an investment decision?

Hale: You can combine them in a pretty straightforward way. For instance, in large-cap blend, there's 102, I think, funds that have low carbon risk. As I said, about 60% of them have 4 or 5-globe ratings. You can clearly use both screens to help you get both a lower carbon risk portfolio and one that on the whole manages its sustainability issues effectively.

Glaser: Jon, thanks for your thoughts today.

Hale: My pleasure.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.