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Country Baskets Not Setting World on Fire

The public’s growing enthusiasm for both index funds and foreign investing has limits after all. Just ask Deutsche Morgan Grenfell, which is planning to throw in the towel on its series of nine global index portfolios less than one year after launching them.

Directors of the funds, known as country baskets, want shareholders to liquidate the nine portfolios at a vote set for Feb. 7. This recommendation reflects a continuing inability to attract sufficient assets and the portfolios’ lack of profitability.

“Demand has fallen significantly short of what we expected,” said Christiana Allaire, a Deutsche Morgan Grenfell spokeswoman, without elaborating. The firm, an arm of Germany’s Deutsche Bank, is the investment advisor to the funds and requested the liquidation.

As with international mutual funds, country baskets have provided an easy way to invest in foreign markets, without the hassles of owning individual stocks. Although their demise is linked to general cost-cutting pressures at Deutsche Morgan Grenfell, the products also feature several unusual wrinkles, some of which undoubtedly have confused and turned off investors:

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* Unlike most international mutual funds, country baskets are not widely diversified. Eight of the nine portfolios focus on stocks in just one foreign nation. The list has four European countries, plus Japan, Hong Kong, Australia and South Africa. The ninth portfolio targets U.S. stocks.

* Also significant is that country baskets are index products, meaning that they buy and hold the same companies that are contained in popular stock groupings in each nation. Index funds are inexpensive to run, which saves shareholders money, because there are no stock-research costs involved. But they’re also viewed as a bit boring, lacking the cachet that a top fund manager can bring. Even among international mutual funds, index products are not numerous.

* Country baskets, unlike mutual funds, are listed on the New York Stock Exchange. This allows investors to trade at various prices throughout the day, to “margin” or leverage their purchases with borrowed money, and to bet against individual markets by selling short. But most investors don’t make use of either margin or short sales.

* Country baskets use an ingenious, if unusual, mechanism that allows institutional investors to arbitrage their shares. The idea is to prevent those shares from slipping to discounts, as frequently happens with exchange-traded closed-end funds.

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But the prevalence of discounts is actually a bonus for bargain hunters.

“For many investors, the chance to buy at a discount is one of the great advantages of [closed-end] funds,” said Gregg Wolper, closed-end editor at Morningstar Inc. of Chicago. “Buying at a discount is a negative only if the discount widens.”

An investment consortium led by Morgan Stanley last year unveiled its own single-country index products, known as World Equity Benchmark Shares, which are highly similar to country baskets in most respects.

The WEBS products have not proved that much more popular--attracting only $275 million in assets, compared with about $240 million in the country baskets--yet Morgan Stanley has no plans to drop any of the portfolios, said Cory Laing, a Morgan Stanley analyst in New York.

“Assets have been growing slowly, but they continue to grow,” he said.

One advantage for WEBS over country baskets is a wider market selection--17 portfolios for the former versus nine for the latter.

Also, WEBS trade at lower prices than country baskets--at a recent median price of $14 a share compared with $32--making it less expensive for people wanting to diversify among, say, half a dozen countries.

WEBS also might enjoy an edge because they target stocks in Morgan Stanley’s own foreign-market indexes, rather than the Financial Times/Standard & Poor’s yardsticks used by country baskets.

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Compared with international mutual funds, both the country baskets and WEBS products provide less diversification bang for the buck. Also dimming their appeal is that investors must buy both products through brokers, paying commissions for each trade, as would not be the case with typical no-load mutual funds.

In addition, the products probably don’t appeal much to investors seeking to simplify their financial lives.


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