International Funds Awaken This Spring
The long winter for international fund investing appears to be drawing to a close, and bears are starting to come out of hibernation.
Foreign stock markets are warming up and the dollar has stabilized in value--two factors that have helped international funds to an average gain of about 5% so far this year. The first three months of 1993 are shaping up as the best quarter for international funds since the July-September period of 1991.
Encouraged by this apparent thaw, several investment pros who had been neutral or negative have boosted their overseas exposure in recent weeks. “International funds are in an up trend,” says Tom Lydon, a vice president at Fabians’ Telephone Switch newsletter in Huntington Beach. “We believe now’s a great time to get in.”
Based on positive price movements in recent weeks, the advisory service March 19 told its 43,000 subscribers to move into selected international funds--the first buy signal for the group since last July. “This area is way overdue for some gains,” Lydon says, noting that two of the last three calendar years have been downers for the foreign funds.
Jack Bowers, editor of the Fidelity Monitor newsletter in Rocklin, Calif., flashed a buy signal for Fidelity’s Diversified International Fund on March 20, his first purchase recommendation for a foreign portfolio since late last year. “I’m starting to warm up to international funds,” says Bowers, who generally prefers to stick with U.S. equity investments.
At current levels, stock prices in this country will probably appreciate at a slower than normal rate, he says, adding that interest rates have more room to drop in various other countries. Germany trimmed its key discount rate half a point to 7.5% on March 18 in response to sluggish economic activity in Europe. That move affirms the trend to lower European interest rates, says George Murnaghan, a vice president at T. Rowe Price Associates in Baltimore.
Certain mutual funds have boosted their holdings of foreign stocks of late. The GAM International Fund, for instance, now has 68% of its assets in foreign-equity holdings, up from 46% at year’s end.
“Overall, we’re still more cautious than bullish, but we’re less cautious than we were,” says Giles Conway Gordon, director of the London office of Global Asset Management, which runs the fund.
GAM International has relatively large investments in emerging Asian markets, notably Hong Kong, which accounts for 22% of the portfolio’s holdings. The fund is also high on Singapore and Malaysia, but has only a 4% stake in Japan, the most disappointing major bourse of the last few years.
Then there are firms such as T. Rowe Price, which was bullish about the international outlook prior to this year and is even more optimistic now. “The U.S. is one of the few markets in the world close to its all-time high,” says a recent T. Rowe Price report on international investing. Foreign stocks, the report predicts, will soon start to pull ahead of U.S. equities--something that hasn’t happened on a yearly basis since 1988.
The emerging economies of the Asia-Pacific region are still growing at an impressive 6% to 7% annual clip, Murnaghan says, and several Latin American countries are making progress.
And while the European economies are still flat, those markets offer more bargains than the United States, he adds. T. Rowe Price sees a significant decline in European interest rates this year, “which should unlock those stock market values for the patient investor.”
It’s likely that more professionals would favor foreign investing if it wasn’t for the currency risk. A rising dollar tends to undercut the values of international and global funds, although a slumping greenback produces the opposite result.
Given that the United States has emerged from recession earlier than many leading foreign economies, C. Beth Cotner, a portfolio manager for Kemper Financial Services in Chicago, figures the greenback will remain strong at least into the third quarter of 1993.
“The times you make the most money in foreign markets is when the dollar’s falling, not rising,” Cotner says. In her view, foreign stocks appear somewhat more attractive than they did several months ago, but she hasn’t materially boosted her international holdings because of the threat of a strong dollar.
Because of currency movements, which are difficult to predict, Bowers suggests that investors view international funds as aggressive plays that shouldn’t total more than 25% of a portfolio.
T. Rowe Price, however, minimizes the dollar impact out of a belief that currency movements don’t exert more than a secondary influence over time.
Besides, says Murnaghan, the dollar’s long-term trend will probably be downward given our budget and trade deficits.
Foreign Favorites The last three years have been tough on international and global funds, yet the following portfolios have held up well. In addition, all realized average compounded gains of at least 8% for the five previous years. Fund Name/ Telephone: Dreyfus Strategic World (800)645-6561 Aver. Annual Gain(‘90-’92): +6.5% Aver. Annual Gain(‘88-’92): +11% Fund Type: Global Max. Sales Charge: 3% Fund Name/ Telephone: EuroPacific Growth (800)421-0180 Aver. Annual Gain(‘90-’92): +6.6% Aver. Annual Gain(‘88-’92): +12.8% Fund Type: International Max. Sales Charge: 5.75% Fund Name/ Telephone: GAM Internatioanl (212)888-4200 Aver. Annual Gain(‘90-’92): +3.4% Aver. Annual Gain(‘88-’92): +10.4% Fund Type: International Max. Sales Charge: 5% Fund Name/ Telephone: Harbor International (800)422-1050 Aver. Annual Gain(‘90-’92): +3% Aver. Annual Gain(‘88-’92): +15.6% Fund Type: International Max. Sales Charge: None Fund Name/ Telephone: Merrill Lynch Intl. Contact local office Aver. Annual Gain(‘90-’92): +3.5% Aver. Annual Gain(‘88-’92): +8.5% Fund Type: Global Max. Sales Charge: 6.5% Fund Name/ Telephone: New Perspective (800)421-0180 Aver. Annual Gain(‘90-’92): +7.7% Aver. Annual Gain(‘88-’92): +11.7% Fund Type: Global Max. Sales Charge: 5.75% Fund Name/ Telephone: T. Row Price Intl. Stock (800) 638-5660 Aver. Annual Gain(‘90-’92): +0.7% Aver. Annual Gain(‘88-’92): +8.3% Fund Type: International Max. Sales Charge: None Fund Name/ Telephone: Scudder Global (800) 225-2470 Aver. Annual Gain(‘90-’92): +4.6% Aver. Annual Gain(‘88-’92): +13.4% Fund Type: Global Max. Sales Charge: None Fund Name/ Telephone: Templeton Foreign (800) 237-0738 Aver. Annual Gain(‘90-’92): +4.7% Aver. Annual Gain(‘88-’92): +12.8% Fund Type: International Max. Sales Charge: 5.75% Fund Name/ Telephone: Templeton Growth (800) 237-0738 Aver. Annual Gain(‘90-’92): +7.6% Aver. Annual Gain(‘88-’92): +13.5% Fund Type: Global Max. Sales Charge: 5.75% Source: Morningstar Mutual Funds, Chicago
