Note to Investors: Firms With Vision See Future Abroad

About a month ago, Merrill Lynch & Co. stock fell $8 a share, or 11%, in one day as investors became anxious about the financial services giant’s exposure to trouble in Asia, Latin America and other overseas markets.

Yet last week Merrill stock gained 6% to $70 a share as investors hailed the company’s agreement to pay $5.4 billion--a handsome price--to acquire Mercury Asset Management of Britain, a worldwide pension fund manager with a strong presence in Japan.

Clearly investors are ambivalent toward foreign involvement these days.

But just as clearly, Merrill and other smart companies are confident because they see trends emerging overseas that mirror the growth and development of U.S. financial markets in the last decade.

A look at Merrill’s global strategy, and that of a far less imposing food company, will alert you to the importance of those financial markets--in particular for your own investment strategy.

Merrill is buying Mercury because of yawning opportunities for investment management as other countries turn to private pensions to supplement government social security plans, which are becoming strained. In Japan, where private pensions are well established, the pressure is to open pension management to outsiders.

The potential for growth is huge. Compared with more than $5 trillion of private pensions in the United States and $1.8 trillion in Japan, Germany has only $135 billion in private pension funds, and many countries have less.

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As other countries set up private pension systems, their financial markets may well follow the U.S. pattern. First, pension funds grew to enormous size. Then investment responsibility shifted gradually to individuals, and that gave rise to 401(k) plans, which in turn spurred explosive growth of mutual funds.

All of those developments spelled opportunity for Merrill Lynch, the world’s largest retail brokerage and corporate finance firm.

Merrill has doubled annual revenue in the last five years--to more than $30 billion this year--by making smart bets on foreign markets, investment banking, stock trading in Tokyo and other aspects of global financial services.

The Mercury acquisition will make it a major player in global investment management, where it will compete with Boston-based Fidelity Investments; France’s Groupe Axa, an insurance-based company; and Britain’s Barclays, a bank-based financial services firm.

But a company need not be a giant like Merrill to spot global trends. International Home Foods, which listed its stock on the New York Stock Exchange last week, is a company organized last year to take over the brand-name food products of American Home Products, the maker of Advil, Anacin and other pharmaceuticals.

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International Home’s brands are oldies but goodies: Chef Boyardee sauce, Bumble Bee tuna, Guldens mustard, Dennison’s chili and many more. It will sell more than $1 billion worth of such food products this year, a tidy sum. But it would be hard to expand sales for such “mature” brands in the crowded U.S. marketplace, concedes Dean Metropoulos, chairman of International Home.

So his ambition is to introduce the U.S. brands and to acquire food companies in Latin America. International has been looking at acquisition possibilities in Argentina, Chile and Brazil. In collaboration with a Dallas financial firm--Hicks, Muse, Tate & Furst--Metropoulos acquired Productos del Monte of Mexico last year.

Why Latin America? “Because food distribution through the traditional mom-and-pop stores is now giving way to supermarkets and hyper-markets, Wal-Mart, Carrefour of France and others,” Metropoulos explains.

And that means growing demand for canned and packaged products such as Bumble Bee tuna.

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Further, International’s plan to acquire companies in Latin America reflects a new world in which U.S. financial markets play a key role. Under most traditional circumstances, International Home couldn’t acquire other companies. It was set up with huge debt and now must pay most of its operating income in interest.

But Wall Street likes International’s prospects; its stock, at roughly $23 a share, sells at a relatively high price. So Metropoulos, 50, a veteran entrepreneur and corporate businessman, can use International’s stock as acquisition currency.

Or, he explains, International can use mutual fund money channeled through Hicks Muse, the Dallas firm that financed the acquisition of Productos del Monte and that helped launch International itself in 1996.

Thus, U.S. mutual funds, swelled with U.S. retirement money, find their way into investments that put Chef Boyardee on Latin American store shelves.

In another context, the shifts in U.S. financial markets have honed the skills of Merrill Lynch and other firms to go out and manage the world’s retirement savings.

The value of U.S. financial markets in a changing world is a good insight to keep in mind.

But an even more important insight might be that investing in U.S. companies such as Merrill Lynch or the riskier International Home Foods--as a way of investing globally--is an idea worth considering.

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It’s a fact that U.S. companies do global business more skillfully than U.S. investors have done buying regional or country mutual funds sold by brokerage houses. Over the last five, 10 or even 20 years, investing in such foreign-stock funds has delivered returns far below what U.S. stocks have returned.

The trend has confirmed the strategy of Warren Buffett, the renowned investor, who has said repeatedly that his stance on international investing is to buy stock in Coca-Cola and Gillette. The companies get most of their sales and earnings from overseas operations, and Buffett reaps a global return with fewer risks.

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The reason such country or regional funds--with names like Mexico Fund or Pacific Asia Fund--do poorly is simple: Their approach is too broad and unfocused in the country or region they invest in, yet too narrow in a vast global market.

By contrast, companies managed by people with their jobs and incomes on the line learn hard lessons and are able to apply them. Metropoulos, who headed an international division for GTE Corp. at one point, recalls having a year’s profit for his division wiped out by a Latin American currency devaluation. Such experience makes you skeptical and wiser.

Which is how U.S. investors should be toward the expanding global economy: skeptical of alarms, watchful for opportunity.

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National Nest Eggs

U.S. financial markets are fueled by enormous private pension funds, now totaling $5.4 trillion. Other countries, relying mostly on government social security plans, have not yet developed private pensions to the same extent. But the trend is for them to do so.

Country: Private pension total

United States: $5.4 trillion

Japan: $1.8 trillion

Britain: $850 billion

Netherlands: $325 billion

Canada: $300 billion

Switzerland: $250 billion

Germany: $135 billion

Australia: $90 billion

Sweden: $80 billion

Denmark: $50 billion

Chile: $25 billion

Source: Spectrem Group/Access Research