Why Overseas Investing Proved to Be Siren Song

France’s slim OK of European unity is no big confidence builder for the Europeans, and neither will it do wonders for U.S. investors, many of whom probably are beginning to view foreign investments with great suspicion.

Indeed, last week’s mass confusion in European currency markets just made a bad situation worse for Americans who’ve taken a plunge into foreign stocks and bonds in recent years. First the long Japanese bear market; now a financial disaster in staid old Europe.

Most Americans naturally have no desire to learn the intricacies of foreign exchange arbitrage. All they want is a decent return on their money. By the late 1980s, we were assured by financial advisers of all stripes that the highest returns in the 1990s would be in overseas markets--especially in post-Berlin Wall Europe, which would allegedly be energized by economic union.

It hasn’t worked out that way so far. Nearly three years into the decade, “the (European) markets have been dreadful, and have sadly under-performed the U.S. market,” notes Malcolm Clinger, chief investment officer for private banking at Swiss Bank Corp. in New York.

Japan has been an even bigger loser: Its bear market in stocks will be three years old this December, and the recent recovery in prices looks tentative at best.

What the numbers show is that most Americans would have been better off keeping their money here:

* Say you bought stocks at the July, 1990, peak--just before Iraq’s invasion of Kuwait triggered a worldwide bear market. Even paying peak prices in that year, the investor in the average American growth-stock mutual fund has done quite well: The typical fund is up 19.1% from July, 1990, according to fund-tracker Lipper Analytical Services.

* In contrast, the average international stock fund has fallen 6.2% in that time.

* The numbers are worse for many specialized international funds that targeted stocks in specific regions. The Europe-only funds are down 11.4%, on average; the Japan-only funds have tumbled 36.4%.

Of course, it’s easy to argue that two to three years is hardly a fair period to judge performance, if an investor has a long-term perspective. It’s also worth noting that, from 1985 through 1990, international markets far outpaced the United States. The average international stock fund rocketed 98% in that period, versus 56% for the average U.S. growth fund.

Nonetheless, even the most confident long-term investors shouldn’t just brush off the lousy performance of overseas stock and bond funds in recent years. There’s a lesson in the numbers, and it has to do with a return to normalcy in financial markets.

In the easy-money 1980s, virtually all investments went up in value, and by a lot. What’s more, the sinking dollar gave Americans invested in foreign securities an automatic performance bonus. Foreign currencies appreciated, and thus so did foreign securities.

In the ‘90s, the game clearly has changed. The easy money is gone; the dollar may go up instead of down; Europe may or may not unite; Japan’s bursting real estate bubble may or may not cause more wrenching economic pain there.

All of this poses far greater challenges for foreign fund money managers than their domestic counterparts, who need only pay attention to what happens inside American borders. In essence, we’re in the process of separating the pros from the amateurs in foreign fund management.

It isn’t just foreign stock funds affected by this shakeout. Don Phillips, a principal at mutual-fund rating service Morningstar Inc. in Chicago, notes that many fund companies jumped on the bandwagon to create foreign money-market funds in recent years, because the high yields on short-term investments in Europe were a natural lure for Americans.

But many or most of those foreign money funds were managed based on expectations that nothing would upset the relative stability of European currency exchange rates, Phillips notes. When the currencies went haywire last week, so did the value of the investments in foreign money funds. More than a few of the money fund managers were badly caught off guard.

Chaos, though, always brings opportunities. Going forward, the smartest foreign money fund managers may actually have a greater chance than before to make money for their shareholders, Phillips says. That’s because, should currency values and interest rates continue to diverge across Europe, the smartest managers will be able to play those differences to their advantage.

But at this point, Phillips says, “The question is, how do you know which fund managers can find those opportunities? All you really know is that the stakes have been raised.”

The same is true for foreign stock mutual funds. Mark Kopinski, international portfolio manager for Twentieth Century funds in Kansas City, notes that “up until now, most foreign funds have been managed top-down”--that is, in spreading money around various countries, many managers cued mostly off the size and health of the various economies and their stock markets.

That approach provides diversification, but it often results in the world’s biggest stock markets getting the bulk of foreign fund mangers’ investment--whether or not those big markets promise the hottest stock opportunities at any given time.

That kind of “indexing” works well when all markets are advancing. But in the treacherous environment of the last few years, the only managers who have performed well are those who actively hunted for the best stocks in the best markets.

“We think that kind of bottoms-up approach is the way to go now,” Kopinski says. “It’s really become a stock-picker’s decade,” he adds, quite apart from the rising-tide-lifts-all-boats market of the ‘80s.

The answer for American investors, then, isn’t to give up on foreign investing. Clearly, there are going to be tremendous stock opportunities around the world in the 1990s. The question is whether your fund manager knows how to find them.

Does your foreign fund have its own research offices worldwide, or does it rely on other securities firms’ research? Does the fund manager have a long track record in foreign investing, or is he or she new to this derby? Does the manager speak another language besides English?

These are simple questions, but they get to the heart of the matter of experience. In the 1980s, plenty of dumb people made money. In the tough market of the 1990s, there won’t be any substitute for intelligent management and the priceless benefit of experience.

How Currencies Reacted

The dollar weakened against most key currencies in early Asian trading today, as France’s yes vote on European unity helped calm some nerves.

Country/ Currency per dollar: currency Fri. Today Britain: pound 0.578 0.577 France: franc 5.130 5.032 Germany: mark 1.504 1.480 Japan: yen 124.6 123.7 Switz.: franc 1.306 1.296

Source: Reuter

Foreign Investing: A Dismal 2 Years

The chaos in European financial markets last week--while U.S. markets stayed calm--may have caused some U.S. investors to wonder if investing overseas is worth the bother. In fact, over the past two years foreign markets’ performance has been dismal compared to U.S. markets. A look at the best-performing U.S. growth stock mutual funds since mid-1990 versus the best-performing international stock funds:

Top U.S Growth Funds

Total return Fund 7/90 to 9/92 CGM Cap. Development +55.1% Fidelity Contrafund +52.8% Vista Capital Growth +51.8% Strong Common Stock +49.4% Berger One Hundred +47.7% Fidelity Adv. Equity +46.1% Phoenix Capital Apprec. +45.7% Westcore Midco Growth +39.7% Fidelity Blue Chip +39.6% Fidelity Adv. Growth +39.1% Avg. U.S. growth fund +19.1%

Top International Funds

Total return Fund 7/90 to 9/92 GAM Intl. +17.9% Europacific Growth +8.7% Smith Barney World +7.1% Wright Intl. Blue Chip +7.0% Glenmede Intl. +6.0% Merrill Dev. Capital +5.8% Templeton Foreign +5.7% Bartlett Value Intl. +3.8% Managers Intl. Equity +3.5% Lexington World. Emg. +2.3% Avg. intl. fund -6.2%

Returns measure capital gains plus any dividend income. Period covered is July 12, 1990 to Sept. 10, 1992.

Source: Lipper Analytical Services Inc.