Saturday, July 22, 2000

The Sophisticated Investor

International growth fund a smart move

By John Waggoner
USA Today

        For many investors, an international fund is like an anchor: a dull, heavy weight that keeps your portfolio from moving. Experts are still bickering over whether investing abroad helps returns at all. But adding an international growth fund could help get your portfolio moving again.

        Hoary financial planning advice says you should put 15 to 25 percent of your assets in funds that invest in foreign stocks. The reasoning: Almost half the world's stocks are traded elsewhere. And international stocks are not closely correlated with U.S. stocks, so they may not fall when American stocks do.

        But international funds have done little for most investors' portfolios recently.

        Suppose you had invested $7,500 in the Standard & Poor's 500-stock index a decade ago, and put $2,500 into the Lipper International Fund index, which tracks the largest international funds. You'd have $32,122 now.

        But say you dumped all $10,000 into the S&P 500 instead. You'd have $51,395 now, a $19,273 difference. For that kind of money, you could get your international exposure sipping cognac on the Concorde.

        Why have international funds fared so poorly?

        • The nation has been on a tear. The S&P 500 soared 251 percent the five years ended Dec. 31, assuming reinvested dividends. That's its best performance in 40 years. Any other investment looks shabby.

        • Currency changes add risk. International funds have to convert their profits to

        U.S. dollars. That can help or hurt. When the dollar falls in value, it helps. When the dollar rises in value, it hurts. In recent years, the dollar his risen against most world currencies, which has put international funds at a disadvantage.

        Steve Savage, editor of The No-Load Mutual Fund Analyst newsletter, isn't quite ready to throw out international investing.

        And he makes an intriguing observation. Just as there is a sharp difference in performance between U.S. stock funds with different investment styles, there is also a big difference between international funds with different investment styles. But fund analysts tend to lump all international funds together.

        For example, U.S. stock funds that look for red-hot earnings growth are called growth funds. Growth fund managers are in constant rivalry with value managers, who look for beaten-up, undervalued stocks.

        The difference in investment style is considered so important that Morningstar, the mutual fund tracker, has nine separate style-based classifications for U.S. funds. Morningstar's rival, Lipper, offers 15 style categories. And style does make a big difference: Large-company growth funds have soared 456 percent the past 10 years vs. 301 percent for value funds.

        But international funds aren't categorized by style. And a quick look at style breakdown shows that style seems to make a huge difference. For example, the Morgan Stanley Capital International World (excluding the United States) Value Index rose 12.8 percent the past 12 months vs. 23.2 percent for the growth index.

        In short, growth has clobbered value worldwide. In part, that's because most growth funds are heavy in new-economy technology stocks, while value funds often favor old-economy manufacturing companies. The changes that have powered U.S. stocks are now happening abroad, particularly in Europe, said Henrik Strabo, co-manager of the American Century International Growth fund.

        Mr. Savage isn't willing to say that you should favor one over the other. “We just think that if you think of international funds generically, you may be creating portfolio problems you're not aware of,” he said. For example, you could be loading up on value funds when you are more inclined toward growth.

        Not surprisingly, Mr. Strabo thinks growth is the way to go. “Our mantra is that money follows earnings growth,” he said. European companies are gradually becoming more Americanized: Management is being compensated for improved results, for example, and smaller companies have greater access to capital. “All of these point toward growth,” he said.

        Growth funds tend to be more volatile than their value-oriented rivals, so if you can't stand sudden downturns, consider a top-performing international value fund, such as Longleaf Partners International, (800) 445-9469, or Oakmark International, (800) 625-6275, both of which have top records this year.

        But if you're looking for a propeller instead of an anchor for your portfolio, consider an international growth fund.


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