When it comes to international mutual funds, Wright Investors' Service seems to have the wrong approach.
This Bridgeport, Conn., firm offers an unusual lineup of 11 single-country funds of the regular, or open-end, variety. In doing so, it goes against two key rules of thumb, which state:
* Don't buy single-country funds, which tend to be more volatile than more broadly based cousins.
* If you do buy single-country funds, stick with closed-end portfolios selling at a discount.
Proving that rules of thumb die hard, Wright's 11 single-country EquiFunds, which target markets from Hong Kong to Holland, have been slow to catch on. The portfolios average just $15 million or so in assets, even though some have been around for more than a decade.
Reflecting their volatile nature, at least one of the 11 EquiFunds has finished among the 25 worst performers of all mutual funds in each of the past four quarters, according to Lipper Analytical Services of Summit, N.J. And of the four EquiFunds that have been around long enough to be evaluated by Morningstar Inc. of Chicago, all four have subpar ratings.
So why in the world might you want to purchase an EquiFund or one of the 11 other Wright mutual funds available to U.S. investors?
The most obvious reason relates to the company's research capabilities. After 35 years in the investment business, Wright has developed one of the world's most extensive stock-picking databases--covering 1,000 information items on 13,000 companies in 42 countries.
Users and distributors of Wright's research include Fidelity Investments, Goldman Sachs, Morgan Stanley, Aetna and Putnam Investments. The company maintains 15 analysts in Connecticut, 75 in Ireland and 25 in India. Wright happens to manage more foreign country and regional mutual funds than any other organization, says Albert Meric, the company's executive vice president.
Another reason to consider Wright relates to the pure nature of the funds the company manages. Investors seeking exposure to, say, Japan will get a full basket of Japanese stocks, with virtually no holdings in cash or other types of investments, and no currency hedging. Both characteristics help to explain why many Wright funds bounce around a lot, but they also serve the interest of asset allocators who want reasonably pure positions with which to work.
"If you as an investor want to take a position in Japanese stocks while we had 25% of our Japanese fund in cash, we would undermine your allocation decision," says Meric.
What's more, open-end funds offer a more direct play in a country's stock market than closed-end portfolios, Meric argues, since shareholder returns don't depend on premiums or discounts. With an open-end fund, the price per share directly reflects the prorata value of the underlying stocks and bonds owned. With a closed-end fund, the price might rise to a premium above the per-share portfolio value or slump to a discount, depending on the whims of investors.
Currently, most foreign closed-end funds trade at discounts, but investors face premiums in a few markets. The prevalence of premiums or discounts varies over time.
"Last year, many closed-end funds were trading at premiums," says Stephen Barnes, a Phoenix investment adviser who has placed Wright EquiFund Japan in client accounts.
Wright's main attraction, in Barnes' view, is that the single-country portfolios offer more concentrated foreign investment plays than what's typically available in open-end funds. But he cautions that buying shares in a volatile market such as Mexico can result in a "wild ride."
Besides the 11 EquiFunds, Wright has five bond, one money market and five stock funds for U.S. shareholders--a dozen other funds are available to foreigners only. Of the portfolios open to Americans, the largest is Wright International Blue Chip Equities, which like other Wright portfolios targets big foreign stocks with modest debt and three or more years of profitability. Morningstar gives the fund a lukewarm evaluation, citing long-term returns that are "only decent," but notes that performance has picked up lately.
Shareholders pay no sales charges to buy any of the Wright funds, and the minimum purchase for both individual retirement accounts and regular accounts is $1,000.
Wright officials admit they have a way to go before their funds become household names. "Not a lot of people in the general public know about Wright Investors' Service," said Stephen Holmes, the company's national marketing manager, during a recent talk to independent financial advisers.
But before Wright can achieve a reputation in the mutual fund area equal to its stature in investment research, it's going to have to boost the performance of its portfolios and increase their sizes--and stay off those bottom-25 lists.