Diversify your portfolio by investing internationally: if you want to expose your money to a high-growth market, foreign funds are your best bet.
"I think that over the time horizon that I'm investing, Africa represents the highest growth potential," he says. "I can close my eyes and not worry about peeking at it for another 10 years. I'm hoping that it will double three or four times."
Wilkins, whose time horizon is 18 years, has the right idea. The average investor limits his or her portfolio to domestic securities. But anyone who is interested in growth and safety should take a closer look at foreign securities, experts say.
The best way to take advantage of profits overseas is by investing in mutual funds, which will help to minimize volatility. Fund managers agree that the benefits of international investing far outweigh the risks. But remember that foreign funds are not a short-term story: Prepare to park your money through thick and thin for at least a decade.
A BROAD APPROACH
In 1995, the return for U.S general equity mutual funds was 31.2% compared with 15.8% for global funds and 6.6% for international mutual funds, according to Morningstar, the Chicago-based firm that tracks mutual funds. Clearly, domestic funds did better than foreign funds, but analysts expect that to change soon.
Walter Frank, chief investment officer with the MoneyLetter, a mutual fund newsletter, says this year's profits in global and international funds will grow more rapidly because of changing circumstances abroad. "They have more room to grow than we [U.S.] do," he says. "And there's a good chance in Europe for lower interest rates. Put it all together and it's a positive outlook for international and global mutual funds."
Emerging markets, such as South Africa, are poised to do well. A good example of this trend is Calvert New Africa Fund (800-818-2791), a $9 million Pan-African fund. With a portfolio of both stocks and bonds, it's administered by New Africa Advisers, a subsidiary of the Sloan Financial Group in Durham, N.C.
According to Justin Beckett, president of New Africa Advisers, the fund represents a unique approach to portfolio diversification. "If you're an investor and want to diversify and get exposure to a high-growth market, this is for you," he says. "We constructed it because Maceo Sloan [Sloan's CEO and president] wanted a fund that invested in Africa. He was committed to having a fund that the average person could invest in." The fund, which has been operating since April 1995, was up 2.42% last year.
It may come as no surprise that other hot regions include Latin America, Asia and Eastern Europe. According to the World Bank, East Asia and the Pacific is expected to grow 7.7% from 1995 through 2004; South Asia, 5.4%; Latin America and the Caribbean, 3.5%; and Europe and Central Asia, 3.4%.
World markets have undergone profound changes in recent years. By investing globally in emerging markets, investors can maximize their returns. These emerging markets also offer business opportunities (see "Tapping Into Emerging Markets," this issue).
SIZING UP THE MARKET
There are two categories of foreign funds: global and international. The difference is that international funds hold securities exclusively outside the U.S. with no American exposure. Global funds hold U.S. as well as foreign securities.
Global funds outperformed international funds in 1995 since they were invested in U.S. stocks, which produced stellar results. Take for example, the Aim GlobaL Growth Fund (800-347-1919), which was up 30.1% in 1995, in comparison with the Aim International Equity Fund, which gained 16.4%. But that doesn't mean that you should avoid international funds.
"We think that for the long term it's a good idea to invest in foreign funds because you can get exposure to faster growing companies outside the U.S.," says Paul Rogge, co-manager of the Aim International Equity Fund (800-347-1919). Location makes a difference. "Italy was down last year, and it's been our experience that you want exposure to countries that have underperformed," he adds. Foreign funds can diversify by investing in various countries and regions, such as the Pacific Rim. But experts advise caution when investing in any single area.
The John Hancock Global Marketplace Fund (800-225-5291) earned the No.1 slot on BE's annual listing of the best global funds (see "Win, Lose or Draw," April 1995). Its portfolio has 12% of its holdings invested in Europe, 7% in the Far East and 70% in the U.S.
Fund Manager Bernice Behar says that "by diversifying your assets between countries, you take advantage of growth in different marketplaces over time." She notes that the fund's specialty is investing in foreign retailers.
The fund's largest holding is a French supermarket chain, Carrefour. The top performing overseas holding is Gucci, up 110% since late October 1995. Still, it's inevitable that some markets are going to outperform others, regardless of whether the fund has a broad asset base.
Inherent in foreign mutual funds is the ability to sidestep some risks normally associated with investing in foreign securities on your own. It's tough enough for an individual to understand the value of U.S. investments. Well, investing overseas is complicated by the fact that in order to pick foreign securities you have to follow foreign economies, interest rates, tax Laws, currencies' potential growth, political climate and the profitability of each company.
With mutual funds, you don't have to worry as much about these issues. In regard to political stability, the fund manager, being familiar with developments in that country, will steer clear of trouble spots.
Currency risk is also a part of the equation when investing overseas; since the performance of foreign stocks is partially driven by the value of the U.S. dollar. When you put $1,000 in an international fund, you're actually buying foreign currency your dollars--for French francs, Japanese yen or German marks--in order to buy stocks.
Two factors affect how much money you make abroad: how well foreign markets perform and how well the U.S. dollar does relative to foreign currencies. "When the U.S. dollar grows stronger, you experience a currency loss on your foreign holdings," explains Albert J. Fredman, co-author of Building Your Mutual Fund Portfolio: A Passport to Low-Risk, High-Return Investing (Dearborn Financial Publishing, $19.95; 800-829-7934). "But when the U.S. dollar weakens," he adds, "foreign currencies appreciate, providing an added boost to your investment returns."
Harry Hartford, fund manager of the Hotchkis & Wiley International Fund (800-346-7301), takes currency risk into consideration when selecting stocks. "We look at the stock's expected return in U.S. dollars," he says. "Every stock must produce a return which compensates us for an appreciation of the dollar. In that respect, companies that aren't capable of delivering returns when the dollar appreciation is factored in are less likely to be included in the portfolio."
The $180 million no-load fund (ranked No.5 on BE's list of top-performing international mutual funds) was up 19.9% in 1995. Its portfolio is weighted as follows: 15% in Japan, 14% in the U.K., 9% in Switzerland, 10.5% in Hong Kong and 6% in France. Its largest holdings are Jardine Matheson, a holding company for trading, distribution and financial services; and Dixon Concepts, an international wholesaler and retailer of luxury brand-name goods. Other major holdings include Nichicon, a Japanese electronic components manufacturer; BAT Industries, a tobacco and financial services company based in the U.K.; and Lafarge, a French cement company.
Other no-load foreign funds to consider include T. Rowe Price International (800-638-5660) and Vanguard International (800-662-7447).
MAXIMIZING YOUR MONEY
Would-be investors should start out by investing generally in the market, then move to a specific area. Some U.S. mutual funds invest a small portion of their presence. "As you get more comfortable, you'll begin looking at a specific: part of the world, whether it's Japan, Latin America or Europe," says Jon Teall, a research coordinator with Lipper Analytical Services in New York.
Gwen Kirkland, an investment broker with American Investment Services who specializes in mutual funds, recommends the SoGen International Fund (800-334-2143), a global fund with $2.9 billion in assets. It was up 15.2% last year.
The portfolio's fund manager, Jean-Marie Eveillard, has 64% invested in equities; of this, 35% is invested outside of the U.S. About 40% of the foreign securities are invested in Europe and 30% in the Pacific Rim. "Last year was a so-so year for most foreign equity markets," says Eveillard. "But now is probably a much better point in time to gain exposure to foreign equity markets. Don't wait until the market have a terrific year. Move in before an area is hot because you want to try to buy low and sell high."
For more conservative, but less aggressive foreign investing, consider the Scudder (800-225-2470) family of international and global funds, which includes the Scudder Latin America Fund, Scudder International Fund and Scudder Pacific Opportunities Fund.
To increase your chances of having a good experience investing abroad, seek out fund companies that have a network of analysts who know their foreign markets and visit those companies they are investing in.
Risks are monitored better by fund managers, says Fredman, because they have access to information that isn't readily available to the average person.
Of course, you may end up paying higher investing expenses because of the cost of value-added research abroad and higher trading costs in many markets.
In some cases, the management fees for a foreign fund could be 1.25%, compared with .75% or less for a domestic fund.
"The management fee is higher because the fund company may be using a manager based overseas," explains Fredman. "They have to be familiar with the ways of the company and the way the stock market works, so there can be extra costs involved."
If you're bent on investing in stocks, consider companies that you are familiar with that sell to the world. For example, Coca-Cola, Intel, Citibank, Motorola, Microsoft and McDonald's earn a large percentage of their profits abroad.
Still, Wayne Weddington, president of Pennoyer Capital Management, cautions individual investors against investing directly in international stocks through retail brokers. "You're better off investing in mutual funds because with a small portfolio it's impossible to diversify. Let the fund manager make the decision which international stocks to buy."
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|Title Annotation:||How To Do Business Overseas; profiles and telephone numbers are provided for a selected group of funds|
|Article Type:||Cover Story|
|Date:||May 1, 1996|
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