WEBS Give Entree to a Country’s Entire Market

If a camel is a horse designed by a committee, WEBS look like securities designed by either Congress or Rube Goldberg.

WEBS stands for world equity benchmark shares. WEBS are single-country index funds, the Morgan Stanley Capital International Indices for 17 different countries--one WEBS per country.

Now take a deep breath and read the next three paragraphs carefully.

WEBS are sold as regular stocks on the American Stock Exchange, but they are registered as open-end mutual funds. Yet they are defined on the WEBS Internet site (https://websontheweb.com) as equity securities, not mutual funds.

To complicate matters further, WEBS act more like closed-end than open-end mutual funds, because a limited number of shares are issued. The value of the shares is based on the underlying net asset value--the total value of the securities in the portfolio, minus expenses.

As with closed-end funds, their shares can trade at premiums or discounts to the net asset value. This means their price may be more, or less, than the value of the underlying stock portfolio, depending on investor demand.

Unlike with closed-end funds, large investors or institutions can buy what are called creation shares to close the discount gap and pick up a quick profit. A large brokerage seeing WEBS Japan shares selling at a 5% discount to the underlying portfolio value, for example, can buy a creation unit of 600,000 shares.

The brokerage is allowed to redeem the stock portfolio at full net asset value, picking up the 5% difference, since the underlying stock is worth more than the WEBS share price. The ability to do that helps keep the WEBS price closer to the net asset value than it would be without that mechanism, traders say.

Although open-end funds are priced once a day based on their net asset value, WEBS are priced throughout the day, like issues. Their net asset value is priced daily.

Like regular stocks, WEBS can be sold subject to stop orders and price limits. They can also be sold short, whereas mutual funds usually aren’t. Unlike regular stocks, WEBS can also be sold short during a downtick in the market because of an exemption by federal regulators.

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Got all that?

It was Gary Gastineau and his colleagues at the American Stock Exchange, not Rube Goldberg or Congress, who created this complicated security.

Whenever you are designing something new in a financial product, you are working in a complex regulatory framework. It has to fit a pigeonhole, said Gastineau, who is senior vice president for new products at Amex.

If you want this thing to pass muster and be used by a large number of people, it has to have characteristics that are similar to something regulators are used to approving.

This is why the Web site states that WEBS are not mutual funds. The Securities and Exchange Commission specifies that while WEBS are registered as mutual funds, an explicit disclaimer that they are not mutual funds is needed, Gastineau said.

Why would an investor want to buy into these? Because you are buying a single share that gives you an entire market, essentially.

There is another reason: You might make a lot of money. Because WEBS are classified as funds, Lipper Analytical Services Inc. ranks their performance. It was a surprise to see two WEBS, Italy and Spain, near the top for the 12 months ended March 31, posting spectacular returns of 80.7% and 76.9%, respectively.

In just the first quarter, WEBS Spain returned 38.5%; WEBS Italy, 34.4%. Also in the top 16 funds for the quarter was WEBS Malaysia, at 27.2%, thanks to a bounce-back from the bad second half of 1997.

The WEBS Malaysia returns are what investors need to keep in mind when considering single-country index funds.

WEBS Malaysia has had a rocky 12 months, and the shares lost almost a third of their value in July and August as the Asian financial crisis hit. It was selling at $14.75 a share March 31, 1997; $6.25 at the end of October; and $4.93 at the end of January, before rebounding to $6.31 at the end of March. So the 27% quarterly gain is still 57% below its close a year ago.

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Spain and Italy, on the other hand, have spent the last year getting inflation and budgets under control in order to be eligible to join in European monetary union. And while their increases in that period were not a straight line up, they have resumed their strong growth.

WEBS are volatile, subject to currency and political risks.

Still, the exposure is less risky than when buying individual stocks in those countries, said Mike Cinieri, vice president and head WEBS trader for Morgan Stanley Capital International. But you still have full exposure to the country’s currency fluctuations.

WEBS for Korea, Malaysia and Singapore are down, he said. If you bought them in December, you got some back, but if you bought them last April, you’re still down. Europe has outperformed everyone, including U.S. markets.

The 17 WEBS--11 more are in the works--have a total value of about $750 million. Cinieri and Gastineau expect them to hit $1 billion soon.

By the way, WEBS come from the same people who brought you SPDRS, or Standard & Poor’s depositary receipts, pronounced spiders. See a pattern here?