What is EAFE?

EAFE stands for Europe, Australasia and the Far East and is usually talked about in relation to stock market index funds.  These funds aim to hold a basket of stocks which track the performance of a stock market index.

The funds give investors the opportunity to tap into a range of stocks in international markets without having to research the stocks themselves or follow what is happening in foreign markets.  They are a low cost way to get diversity into a portfolio through foreign markets because they are designed to track an index rather than requiring more active (and therefore expensive) management to research and select particular stocks.

The striking thing about EAFE-based products is that they do not have much exposure to emerging markets so there is some debate about how truly representative they are of global investment.   The MSCI EAFE Index, for example, only has holdings in Hong Kong and Japan in its Far East component, so does not have direct exposure to rapidly developing markets such as China.  It is also weighted to the stock market capitalizations of the 21 countries represented which means that Britain and Japan, with the biggest stock markets, dominate the weighting.  It is worth noting there are other index funds available for emerging markets and the BRIC (Brazil, Russia, India and China) countries that have been such strong performers.

Other fund managers design products around the MSCI EAFE Index or use it as a benchmark.  The iShares MSCI EAFE Index Fund seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of publicly-traded securities in the markets measured by the MSCI EAFE Index.

At 31 August, its top holdings were:  financials 26.43 per cent, industrials 11.33 per cent and consumer discretionary 9.84 per cent.  The fund did not hold more than 2 per cent of any one stock and the top stock holdings were HSBC Holdings PLC, BP Plc, Nestle SA-REG, Banco Santander SA and Total SA.

When looking at an EAFE fund, investors have to look at the weighting of countries within the fund, as that will affect its performance, and consider how long they want to hold the investment.  Stock market index funds are usually thought of as passive investments.   Investors who want some international exposure in their portfolios might consider whether they want greater diversity outside EAFE.  There are products which add other countries to EAFE and which are a mix of EAFE and the local stock market.