Down-home investors have done fine with overseas funds in '85
Boston — You don't have to understand the nuances of the Bangladeshi jute crop. Or the political stability of Belize. Or the risk exposure of Japanese property and casualty insurance companies. But if you want a leading mutual fund today, you do have to be globally minded. International and global mutual funds have outperformed virtually all other the funds throughout 1985. (International funds, by definition, invest outside the United States; global funds invest abroad as well as in the US.) And the nice thing about international investments via a mutual fund is that professional managers make it their business to understand overseas stocks.
Besides their stellar performance, a key reason to choose an international or global mutual fund is diversification.
Most mutual funds hold shares of hundreds of American companies. The classic reason, of course, is that US economy is so big and varied that if one industry or company falters, others will carry the fund through.
But it's not a big secret that the US is more and more a part of the world economy. The imports driving on US highways are just one obvious sign of this. Moreover, as other nations develop, their home-grown enterprises (banks, utilities, construction firms, conglomerates) often experience rapid growth even without firing goods at the US market.
If the US economy trips, virtually all US businesses are affected. Overseas economies, however, may continue to do well during a US recession. And they may do even better than the US during boom times: In the past five years American equities have been outshone consistently by overseas stocks (see chart).
So real diversification today means global diversification. If the dollar continues to weaken and growth in Europe, Asia, and the third world remains strong, overseas investments should continue to excel.
Despite this, international mutual funds, for the first nine months of the year, still accounted for only $1.2 billion of the $77 billion in fund sales by members of the Investment Company Institute, the leading mutual fund association.
There are 37 ICI-member funds geared to the world market today (eight new ones this year), compared with a total fund count of 1,432. But the recent performance of overseas-oriented funds is sure to enhance their popularity.
Take the Boston-based Putnam Group's International Equities Fund. As of mid-November, this global fund, with assets of $75 million, had appreciated 48.8 percent for the year; since 1979 the increase has been an impressive 225 percent.
Walter Oechsle, president of Putnam International Advisers, says the fund has traditionally had a hefty weighting of US stocks -- upwards of 50 percent. But in mid-1984 he determined that European markets had ``incredible bargains'' and oriented the portfolio in that direction.
``That has been the key factor over the last few years,'' Mr. Oechsle says, referring to the ``very explosive growth'' of European stocks. Enhancing this was the change in the value of the dollar beginning about midyear and accelerating in September with the Group of Five agreement.
US holdings are now 22 percent of the Putnam portfolio, followed by Japan (20 percent), West Germany (16), and a host of European stocks. Mr. Oechsle says he may do some profit taking in Europe in the months ahead and shift a bit more toward the Far East in 1986.
Another top performer over the past year has been Merrill Lynch's Pacific Fund, based in Princeton, N.J. It gained 44 percent in the 52 weeks leading up to mid-October.
Portfolio manager Stephen I. Silverman is quick to point out that the Merrill Lynch fund, with assets of $140 million, is conservative and concentrated: ``We have large positions in less than 30 stocks. The majority of the portfolio is in Japan, and the largest share, 30 percent, is in insurance companies.''
Mr. Silverman says analysis of Japanese property and casualty insurance companies showed them to be undervalued when accounting adjustments were made and the improving quality of their reinsurance lines was considered.
The Pacific Fund was founded in 1976 as a way of participating in the growth of Pacific Basin nations -- primarily Japan, but including Hong Kong, Malaysia, Australia, and others. Silverman says that even if, as some economists expect, Asian growth slackens, his portfolio should do well, since ``the companies we own are good deals'' -- that is, are chosen on a fundamental basis.
Although several other funds eclipsed it over the past year, one of the hottest investments recently has been Transatlantic Fund, based in New York. It rose 19.9 percent between August and the end of October.
Portfolio manager Henry de Vismes remains bullish on Western European economies, where he sees corporate profits growing faster than in both the US and Japan. Two-thirds of his portfolio's $37 million in assets are in British, German, Dutch, French, Italian, and Scandinavian stocks, with most of the rest in the Far East.
Mr. de Vismes is not alarmed by the possibility of radical exchange-rate changes (he figures the dollar will continue a slow slide) or rising tides of protectionism in the US. He says most of the European companies he favors do not depend on exports to the US but do well in intra-European trade.
Looking at 1986, de Vismes says he is shaping his portfolio with a bit more exposure to France, less to Germany, more to the Netherlands, Sweden, and Switzerland. His biggest holdings are in real estate, insurance, and European merchandising (a judgment that European consumer spending will pick up). He expects Europe to remain strong through the first quarter of '86, at which time he says he might consider taking profits and perhaps looking again at the Far East.
All this seems firm evidence that the global approach pioneered by John Templeton in the 1950s pays off.
In New York last month, Mr. Templeton told shareholders he is still committed to his international investing philosophy. He noted, however, that the very success of European and Asian stock markets makes them overvalued today: ``Share prices in most European and Asiatic markets are up twice as much as they are in the US.''
``At one time over 50 percent of our funds were in Japan, . . .'' Templeton said. ``The average stock in Japan, as measured by the `Dow' there, is selling at 26 times earnings, or twice as high as the average American stock on the Dow average. . . . These are not the times to buy stock in Japan.'' He does see bargains, however, in Australia, the Netherlands, Sweden, and Spain.
One of the nice things about international mutual funds is that the world is a big place. Mutual fund managers can have differing global economic outlooks. But each can still be right about his or her specific corner of the world, specific country, specific industry, specific stock -- or all of these.