Market Watch : World Funds: A 1990 Star

Just 10 years ago, the concept of money market mutual funds was still new. Today, the funds hold a whopping $438 billion of investors’ cash.

Now, the money market concept has been expanded to a global view: Just as U.S. money funds invest in short-term, high-quality IOUs of U.S. companies and government agencies, a new category of funds called “short-term world income” funds invests in short-term IOUs of foreign companies and foreign governments.

The fund manager that claims to have started it all is Huntington Advisers of Pasadena. And in 1990, Huntington’s three International Cash Portfolio funds scored total returns of between 14.4% and 20.3%--ranking all three in the top 20 of 1,800 income funds tracked by Lipper Analytical Services of New York.

Huntington’s high returns last year, and those of other short-term world income funds, were swelled by the dollar’s plunge versus major foreign currencies. That’s key to understanding the major difference between these new funds and conventional money market funds: Besides seeking attractive yields on foreign IOUs--which often pay much more than U.S. IOUs--the world funds offer a way to bet on the value of the dollar versus foreign currencies.

As the dollar falls, investments denominated in foreign currencies automatically rise in value. To illustrate, say you own a Japanese IOU worth 134 yen. That amount of yen buys $1 right now. If the dollar falls--say, to 120 yen per $1--your 134-yen IOU is worth $1.11 when converted back to dollars.

Last year, as the dollar dropped against most currencies, short-term world income funds recorded big capital gains. For many of the funds, half or more of their returns came from the dollar’s move. The rest was interest earned on the IOUs.

But the dollar can fluctuate up or down, of course. And lately, the dollar has been rising in value against other currencies, as investors have sought a safe haven because of the impending U.S.-Iraq war. In the month of December, the International Cash High Income fund posted a negative return of 0.73%, even though the return for the full year was 18.5%.

December’s move is a warning to investors that, unlike with U.S. money market funds, you can lose money in the new world income funds--despite the very short-term maturities (under 120 days) of the investments they buy. A big rise in the dollar could offset whatever interest you earn from the funds’ IOUs.

Donald Gould, Huntington’s president, is quick to say that these funds “are not for widows or orphans.” Instead, Huntington aims the funds (minimum investment: $2,500) at what it hopes will be more sophisticated investors who understand the risks and rewards, and the concept of using overseas investments to hedge U.S. investments.

Huntington’s three funds--High Income (assets: $47 million), Global Cash ($80 million) and Hard Currency ($38 million)--are designed with different twists, to appeal to different investors:

* High Income invests heavily in the highest-yielding IOUs on the globe, which today are found in such nations as New Zealand, Australia and Canada. It also may own U.S. investments.

* Global Cash looks more for total return rather than just yield and thus may invest heavily in U.S. IOUs if the outlook is for a stronger dollar. Right now, in fact, 56% of the the fund’s assets are in U.S. investments, followed by 14% in New Zealand, 10% each in Britain and Japan and 5% each in Germany and Sweden.

* Hard Currency invests in IOUs of the nations that have the world’s lowest inflation rates. It never invests in U.S. investments. Thus, the fund is a pure hedge against dollar depreciation. The fund now has 35% of its assets in Japanese IOUs, 25% in Germany, 15% each in Belgium and France and 10% in the Netherlands.

Gould, who manages the funds with the help of Bankers Trust’s London office, admits that 1990 almost came too easy to world-income fund managers because of the dollar’s slide. “In 1990, you could do well in virtually any major (non-dollar) currency,” he says. “In 1991, you’ll have to be more selective.”

He believes that the dollar may gain overall against European currencies in 1991 but that “the dollar won’t be the strongest currency.” And that leaves latitude for the Huntington funds to try to pick the currencies that will lead the market.

Over the longer term, Gould says, “our view of the dollar remains bearish.” Considering the growing federal budget deficit and weak productivity gains in the United States, he says, “I have some doubts about how competitive the U.S. can be.” If he’s right, that should mean a declining dollar over time--which, of course, is a big reason why his funds exist.

Briefly: Will Kemper Group, parent of Los Angeles brokerage Bateman Eichler, Hill Richards, keep a stock analyst team in L.A.? Bateman’s group of seven analysts is the biggest contingent based here. But Kemper, which is re-centralizing its national brokerage operations in Chicago, is mulling the possibility of moving analysts from L.A., Denver, Houston and Cleveland to Chicago. Mike Patterson, Kemper senior vice president, said Friday the issue still is “an open question.” A decision is expected soon.

WORLD MONEY FUNDS

The International Cash overseas money market funds managed by Huntington Advisers of Pasadena fared extremely well in 1990 as interest rates rose and the dollar fell. Details on the three funds:

1990 total Current Fund name/objective return yield Global Cash: Seeks maximum total return from currency moves and interest earnings 14.4% 6.9% High Income: Seeks high foreign yields 18.5% 9.7% Hard Currency: Pure hedge against dollar depreciation 20.3% 6.7%

Source: Huntington Advisers