Shaken by a series of unnerving political and economic disasters overseas, some Americans are having second thoughts about international stock investing--Wall Street's hot "new" concept of 1993 and 1994.
The mutual fund industry's chief trade group reported Monday that international funds experienced a $38-million net outflow in January, the first time in four years that shareholders redeemed more shares than they bought.
While tiny relative to the $96 billion in assets held by international funds, the January outflow nonetheless was a sharp reversal of the trend of 1993 and 1994, when investors poured an unprecedented $26.3 billion and $27.2 billion in net new money into international funds, respectively.
Perhaps the only real surprise about the January outflow, however, was that it didn't occur a lot sooner. International investing has had little to recommend itself for more than a year now.
European markets were slammed last year by rising bond yields, and most have fallen further in '95; Japanese stocks began to falter in mid-1994 and now are at 14-month lows, in part victims of the devastating Kobe earthquake; and Mexico's economic crisis, which began 13 months ago, has set the tone for an unraveling of stock prices in emerging markets throughout the Third World--a situation now compounded by Sunday's failure of Britain's Barings brokerage, the premier supplier of emerging-markets stock advice.
Only a weak dollar saved international stock mutual funds from a deeper decline than the 0.7% average loss they recorded for 1994, according to fund tracker Lipper Analytical Services. Emerging-markets stock funds, meanwhile, plummeted 9.6% last year, on average.
So far this year, while U.S. blue-chip stocks are hitting new highs, the average international stock fund is down 4.2%, and the average emerging markets fund is off 11.9%.
But what's potentially more troubling for international funds is that some investors are beginning to question the long-term appeal of investing directly overseas--as opposed to simply owning a fund of U.S. multinational companies.
Measured over the past 15 years, the average international stock fund's gain of 500% lags the average U.S. fund's return of 572%, according to Lipper. Over the past 10 years international funds beat U.S. funds, but much of that was dollar related, as the buck plunged between 1985 and 1990. Over the past five years, U.S. funds again beat international, 56% to 31%, on average--despite foreign markets' 1993 surge.
For Americans who understand that they're naturally taking more risk investing overseas, the idea that long-term returns would be below U.S. returns is counter-intuitive. If you're going to accept the risk that Mexico might devalue its currency, after all, you should be paid for that. But it doesn't seem to have worked out that way.
Is international investing on the verge of being discredited, so far as Americans are concerned?
Michael Lipper, head of Lipper Analytical in New York, agrees that conservative investors may reasonably conclude that they're already investing globally if they own U.S. stock funds, given that most major American firms operate worldwide. "If you're a meat-and-potatoes type investor, a blue-chip (U.S.) fund probably covers" all the global exposure you may need, Lipper concedes.
But more aggressive investors may still want a direct foreign bet in their portfolios, Lipper says--despite the results of the past 15 years, and despite the wild volatility in overseas markets.
The world, Lipper notes, was a much different place 15 years ago than it is today. One major reason why many Third World stock markets performed so poorly in the 1980s, for example, is that those countries had largely been commodity-based economies--and commodities were mostly in bear markets in the '80s.
Today, not only have commodity prices rebounded, but some key Third World countries have made the difficult transition to being "value-added" manufacturers, and in some cases even innovators. The firms that dominate those economies now provide stiff competition for the United States, and therefore offer much more potential to create long-term wealth for investors.
That is, for those who are willing to hold on. Kurt Brouwer, of San Francisco money management firm Brouwer & Janachowski, still believes that holding 30% of his clients' stock assets in international funds makes sense. Ignoring foreign markets, Brouwer notes, means ignoring two-thirds of the stock opportunities in the entire world. That, too, would be a risky investment strategy, he notes--the risk of opportunity lost.
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Is Foreign Worth It?
The average international stock mutual fund produced smaller returns than the average U.S. fund did over the past five and 15 years. Over the past 10 years, however, international performed better. Average total return for periods ended Dec. 31, 1994:
Source: Lipper Analytical Services