But anyone who owns internationals today may feel like a tourist caught without a guidebook. The funds aren’t behaving the way you expected. Many stock funds underperformed their American counterparts in 1990 and 1991. Japan’s market crash-far worse than our own-is now in its third, debilitating year. And just last month, a currency convulsion gave money tourists a hard lesson in how changes in the value of the dollar can upend investment returns– especially in short-term bond funds.
The convulsion came in Europe. Britain, Italy and Spain severed their official links to the strong German mark and let the value of their currencies drop. Those currencies also dropped against the dollar, pushing the dollar’s exchange rate up. Because each unit of foreign money is now worth less in American greenbacks, shares in foreign mutual funds are worth less, too. To take just one example, the Kemper Short Term Global Income Fund dropped by 7.6 percent in September, partly because of the currency hit. Lesson one, for international investors: rising dollar, bad. When Europe’s currencies strengthen again against the dollar, pushing its exchange rate down, the dollar price of international investments will rise. Lesson two (repeat after me): falling dollar, good.
When you go foreign, you cannot avoid an element of currency speculation. But long term, it’s worth it. The rapidly changing global economy offers this decade’s most compelling investment themes-among them, the growth of China’s internal market, as its leaders struggle to invent a kind of totalitarian capitalism; restoring the infrastructure of Eastern Europe; restructuring European industry; opening Latin America to private investment and freer trade, and the solid growth of consumer markets in Southeast Asia, as workers there earn more money to spend.
Lesson three, for investors everywhere, is: load up on stocks during a recession, because prices are low and recessions pass. By that principle, most of Europe looks like a buy. Until the recent currency break, Germany was forcing its own high interest rates on its neighbors, driving European economies down. But now rates are falling, or are ready to. Last week, even Germany hinted that easier money lies ahead-and European markets rallied.
As interest rates drop, however, the dollar will rise against Europe’s currencies-indeed, there was a brief rally last week. So American investors face a Catch-22. You want to buy into the profits abroad, but a stronger dollar will chew up some of the money you earn. How do you get the most value while running the least currency risk?
These funds typically buy notes that mature in no more than one to three years, which keeps their share values from fluctuating too much. Recently, they’ve yielded 6 to 10 percent, leading some investors to use them in place of safe moneymarket funds. Now they know better. A few funds limited their currency losses, but many others are down for the year. As the dollar rises, they’ll be hit again.
The good ones are still up for the year, despite last month’s losses. But as rates decline, “a significant piece of the total return could be lost to currency changes,” says Ken Gregory, editor of the L/G No-Load Fund Analyst. Some funds try to hedge this risk, by buying currencies that should go up in value when other currencies go down. But hedges don’t always work as planned. One alternative: “global” funds that buy U.S. as well as foreign bonds.
Their growth potential is high enough to yield handsome long-term profits, even after currency changes. But cheek that the fund is covering the markets you want. Broad-based funds may be emphasizing Europe or Asia. Morgan Stanley Emerging Markets, trading on the New York Stock Exchange, goes for Asia’s next tigers (Indonesia, Malaysia), Hong Kong (a China play) and Mexico, down by 35 percent since June. The new Twentieth Century International Equity Fund, which looks for companies with rapidly rising earnings, has been finding them mainly in Switzerland and the Netherlands. Japan is back in some portfolios; rates there are down, and the market bounced 30 percent in August. The Nikkei index will probably droop again, says Larry Jeddeloh, editor of The Institutional Strategist-and that would be a good time to buy. Strategically, any of these approaches is valid. If you buy and hold, even the currency changes wash out in the end.
AIMEZ-VOUS GROWTH.,
Despite Europe’s recent currency crisis, some top-performing foreign funds stayed on their game. Below, the returns to investors after sales charges.
STOCK FUNDS 1990 1991 1992+ CAM International+ -11.9% 21.6% 8.1% Twentieth Century Int’l NA 10.1% 7.5% Merrill Global Allocation+ -4.7% 28.8% 8.3% U.S. S&P 50, stock average -3.1% 30.4% 2.5% BOND FUNDS 1990 1991 1992+ Scudder International 21.1% 22.2% 8.4% IDS Global+ 7.3% 15.4% 10.0% Huntington Hard Currency+ 17.5% 8.3% 11.8% Lehman Bros. Bond Index 9.0% 16.0% 5.7% +UP TO 9/30/92. AFTER ADJUSTING FOR SALES LOAD PAID IN 1990. SOURCE: INVESTMENT COMPANY DATA
PHOTO: Jane Bryant Quinn
Subject Terms: INVESTMENTS, Foreign
Copyright 1992 Newsweek: not for distribution outside of Newsweek Inc.
