Global warming: money manager sets out to conquer the world.

Money manager sets out to conquer the world

After two years of the U.S. stock market speeding along with nary a retreat, you might be tempted to keep your entire portfolio safe at home. Don't.

Across the Atlantic and Pacific and beyond the U.S. border, there's a world of investments that on a long-term basis have surpassed gains posted by American stocks. Three years ago, having worked everything from mergers and acquisitions to corporate finance, Wayne P. Weddington, president of Pennoyer Capital Management, looked overseas and saw just that: an opportunity, one he says individual investors should heed as well.

Examine long-term comparisons between overseas and U.S. stocks, and Weddington's reasoning becomes clear. While U.S. stock markets may have risen a healthy 14% annually during the 20-year period ending last June, that figure lags Hong Kong, the Netherlands, the United Kingdom, Japan and France. Compounded over 10 years, a $1,000 investment in Hong Kong, the leader in that group, which gained an average 19.79% annually, would be worth $6,084, while the same amount invested in the U.S., which rose 13.92% on average, would stand at $3,684. And by some studies, adding up to a 50% weighting in well-established overseas markets to your portfolio increases your gains while reducing your risk.

Weddington figured he couldn't bypass returns that large, nor could he sidestep the fact that the U.S. stock market now constitutes just 40% of the world's equity pie. "After a few years in the business, I decided to start my own money management company, so I began talking to the heads of pension funds," he recalls. "Almost every one of them asked me if I could develop an international product." Weddington promptly dove headlong into six months of research, digging all the while for a way to track and beat the world markets with just the right mix of stocks. And to cap off efforts, he went so far as to contact and hire a professor of econometrics at the University of Sussex and an astrophysicist at the European Space Agency to help him perfect a way of crunching the numbers he'd need for his calculations.

Weddington first set out to beat the Capital International EAFE Index (the Dow Jones of the international world). He focused on figures for EAFE--as international investing professionals call the developed stock markets of Europe, Australia and the Far East, including the U.K., Germany, France, Japan and New Zealand. By keeping to the largest, most established stock markets, Weddington aimed to limit risk and maximize gains. He also needed to find a way to outperform index funds that invest in all the EAFE stocks. According to Weddington, he's now perfected his stockpicking methodology and is marketing to institutional investors.

What's Weddington looking for? First off, he looks at historical price and evaluation trends over the last eight years, sifting through a number of statistics to ferret markets with good growth potential. He'll also examine whether share prices are expensive or cheap on a given stock exchange by evaluating price-to-earnings and other ratios compared with historic averages. What all that number crunching yields is a picture of just which markets have the greatest potential for gain, and just how cheap that potential is at any given time.

What advice does Weddington have for individual investors? First off, he feels that they can target as much as 50% of their portfolios for overseas investing. That might be a bit much, especially if international investing is new to you. Start slowly, since on average, professional portfolio managers stateside have now positioned approximately 10% of their assets abroad. Weddington recommends that you look at country markets first and foremost, since his research points to the highest gains being made on a market-by-market basis and not necessarily from individual stock picks. Weddington currently likes the U.K., where gross domestic product has been very strong the last six months. He figures a rebound in the Japanese market should last the rest of the year. Malaysia, he says, continues to grow at a very rapid rate, while the Netherlands, his last market pick, is showing positive signs.

Weddington advises individual investors to go for open-ended country-based mutual funds. So, taking his country picks, we turned to Lipper Analytical Services and had the research firm screen for mutual fund picks that focused on Weddington's favorite nations. We looked for funds with the heaviest weightings in Weddington's countries, then ranked them according to annual returns. Wright Equity: Netherlands Fund was the top pick in the Netherlands with a 36.25% for 1996 and a 14.69% average annual return on a five-year basis. In the U.K., Alliance New Europe beat all comers with a 14.09% average annual return over the last five years. The two Asian plays have lesser track records. In Japan, Merrill Lynch's Pacific Fund came out on top with a 6.54% average annual return on a five-year basis. Remember, Japan's a comeback play, with potential we're all aware of. The fund with the best ranking in Malaysia was Vanguard International Index for Emerging Markets with a 7.38% annual return in 1996.

COUNTRY                    WEDDINTON'S VIEW

UNITED KINGDOM             The equity markets remain
                           inexpensive. The last two quarters'
                           GDP growth is in excess of long-term
                           trend.

JAPAN                      Recent rebound should extend
                           through 1997.

MALAYSIA                   Strong growth potential.

THE NETHERLANDS            Positive outlook due to cyclical
                           upswing.

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