Overseas funds are losing some sizzle, but gains still beckon

You don't need an advanced degree from the Kollege of Financial Knowledge to figure out where at least some of your mutual fund money should have been the last few years. Just look at the lists. Since June 30, 1982, just before the start of the bull market, eight of the top 25 funds tracked by Lipper Analytical Services are either international or global funds. International funds invest everywhere but the United States; global funds can put their money anywhere.

The worst of those eight funds, Templeton Global I, gained ``only'' 206.41 percent for the period ended Oct. 30 of this year. The best, BBK International, gave its shareholders a 294.1 percent gain. The No. 2 and No. 3 funds are also internationals. Merrill Lynch Pacific gained 281.96 percent and Vanguard World-International Growth advanced 278.42 percent. By contrast, balanced funds, which invest mostly in US equities, had a combined return of 151.16 percent.

A weakened US dollar, the deregulation of foreign stock markets, and the entrance of dozens of companies into those markets all contributed to a more profitable overseas investment climate. But while a world view has given mutual fund investors livelier stock markets and handsome profits, that view seems to have become a bit cloudy in the last few months.

One reason is the slower slide of the dollar. From one-third to one-half of the gains for many high-flying international funds came as a result of the steeply declining dollar.

When the dollar is falling, gains from foreign investments are worth more, since a profit in Japanese yen, for example, can be converted into more US dollars than would have been the case a few months earlier. Or a fund manager could simply convert some shareholders' cash into a foreign currency, hold onto it, and convert the money back into US dollars a year later.

But since last summer, the dollar's free fall has slowed, and so have the returns on international funds.

Also, Japan, last year's hottest stock market, saw some major reversals earlier this fall, which further cut the returns of funds that had put as much as half their money in the Tokyo Stock Exchange. Since that decline, the Japanese market has rebounded to record highs, but the memory and the lesson linger.

``The reason international funds did so well in '85 was that the dollar was plummeting,'' says David A. Wyss, of Data Resources Inc., a Lexington, Mass., consulting firm. But the dollar had to stop falling sometime, he adds. ``It can't go below zero.''

The more normal pace of foreign stock markets also meant that the returns on international funds were more normal.

``You always have to be careful with a move like we've seen in the international funds,'' says Donald D. Rugg, president of Charlesworth & Rugg, an investment management firm in Woodland Hills, Calif., and author of ``The Dow Jones-Irwin Guide to Mutual Funds'' (Dow Jones-Irwin, Homewood, Ill., $25). After all their gains, he says, ``these funds were vulnerable to a correction.''

``In some case the returns were as high as 100 percent last year,'' notes Henry Shilling, a vice-president at Lipper. ``It was inevitable that level of expectation was not going to be satisfied.''

``The international markets continue to do OK,'' says Gavin Dobson, portfolio manager at the Kemper International Fund. ``But the big-index moves are essentially behind us.''

As a result of these changes, investors' love affair with international funds is expected to cool a bit, but not to freeze. While most experts see returns lower than in the last year or so, they still think international funds will stand up well against their US-oriented counterparts.

For one thing, the dollar is expected to remain somewhat weak. The couninuing US trade deficit, declining interest rates, and the intervention of various central banks to maintain their currencies against the dollar are expected to keep the dollar down.

At the same time, the deregulation, denationalization, and general opening up of securities markets around the world have substantially increased the trading volume in these markets. The most recent deregulation move occurred in London, where the ``Big Bang'' ushered in negotiated commissions and allowed foreign investment houses to participate directly in the British market. Other countries are already being forced to follow suit.

``You're seeing it now,'' observes George Noble, portfolio manager of the Fidelity Overseas Fund. ``Other markets are afraid London will become the place for international investing. Stocks from some countries are traded more heavily in London than they are on their local exchange. So yes, it is bringing a response from the other markets, and I think it helps us, and helps the investor.''

``We're seeing deregulation moves in France, Japan, and on the Dutch, German, and Italian markets,'' Kemper's Mr. Dobson says. ``This all makes the equity markets much looser, more liquid.''

Also, Dobson notes, several major companies that were not available to outside investors are now offered on overseas markets. In Germany, for instance, the stocks of Nixdorf, the computer manufacturer, Porsche, the automaker, and Wella cosmetics have come to market.

Although foreign markets in 1987 are not expected to generate the huge gains of 1985 and early '86, keeping part of your portfolio abroad will probably still be profitable.

But how profitable? For the average mutual fund investor, who does not have the time or information to become familiar with foreign markets and the stocks traded there, 10 to 20 percent of investable assets is probably a good maximum.

One reason for limiting your exposure is volatility. Foreign stock markets - and the funds that invest in them - tend to move up and down much more erratically than US stock markets and funds. This would mean erratic price swings in the price of your fund shares, a situation you may not be able to tolerate financially.

``The main argument for international funds is diversification,'' Dr. Rugg says. ``What proportion you put in [international funds] depends on the volatility of your own portfolio and your own aggressiveness.''

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