Funds,indexes help chart your way through foreign markets
BY TERRY SAVAGE SUN-TIMES COLUMNIST Jul 14, 2006
Updated: May 3, 2013 12:14PM
Originally published: August 1, 2007
How’s the market doing?
These days, it’s important to specify which stock market you’re watching. More than half of the stocks available for trading are listed outside the United States. And despite the well-publicized problems of some Asian markets, many overseas stock markets are posting gains far greater than our own. In fact, for the last five years, the stock markets of eight foreign countries performed better than our own S&P 500.
That trend is continuing as the new year begins. The Dow Jones industrial average is up 5.03 percent for the first week of the year, and the Nasdaq composite index is up 6.92 percent.
But if you only watched the U.S. markets, you missed some really big action. In France, the popular CAC 40 was up 6.94 percent in the first week. Germany’s DAX rose 6.53 percent, and indexes representing the Amsterdam and Italian markets rose a similar amount.
Most investors should take a closer look at how to invest in overseas markets. In this global economy, it’s important to remember that international investing is not synonymous with extra risk, although changing relationships between currencies can add to profits and losses. As an investor, you’ll need to do some extra analysis of economic factors in different countries, or choose a well-run international mutual fund and let the portfolio manager make those decisions for you.
Many experts are predicting that the real action again in 1999 will be in the European markets because of the debut of the euro currency. That’s the opinion of David Lui, portfolio manager of the Strong International Stock Fund and the Strong Overseas Fund (800-368-1030).
He expects the euro to accentuate the bullish trend of European markets. In 1998, the German market was up 17.7 percent for the year, and the French index was up 33.8 percent.
Lui says the advent of a common currency for the 11 ``Euroland’’
countries will enable business to become more productive, restructuring European commerce along the lines of the American model. Although the actual coins and bills of the euro won’t be in the hands of consumers until 2002, prices for consumer goods are now denominated in euros as well as the individual country currencies.
Corporate business transactions and bank transfers are being made in euros, and even credit card transactions are being posted in euros.
The result is price transparency. If a consumer wants to purchase a television or a vacuum cleaner in Spain, the Euro price can be compared with the price of the same item in France. If local Spanish duties or taxes make the price higher, consumers can easily travel to France or order by mail from the French company.
Efficient pricing should be good for European consumers, but efficient businesses might not be so good - from an employment point of view. As companies become more productive, there are bound to be layoffs, which could cause unrest on a continent known for very supportive labor policies. But efficiency is good for business’ bottom line.
Liu and others say it’s not too late for American investors to participate.
On the other hand, international investment analyst Michael Porter of Salomon Smith Barney suggests the big money in international stocks may be made in Asia in 1999. He especially likes the opportunities in the very speculative Malaysian stock market, which he expects to rebound when currency controls are lifted. Porter offers a relatively conservative way of participating in that possibility by purchasing WEBS, the benchmark index of Malaysian stocks.
For those who subscribe to the common belief that the Asian stock markets have been a disaster during the last year, take a look at the performance of the Matthews Korea Fund (800-789-2742). It posted a gain of 96 percent in 1998.
``I think Korea may be paving the way for the rest of the region,’’ portfolio manager Paul Matthews says. ``I truly believe that the currency crisis is firmly behind us. While 1999 may not be a robust year for Asian economies, it could be the starting point for a regional economic recovery which our Pacific Tiger fund is positioned to benefit from.’’
Whether you’re riding the trend in Europe or hoping to catch a low point in Asia or even Latin America, investors must carefully assess the risks. Diversification is one way to minimize risk. The following investment opportunities listed make global diversification easier for American investors, but they don’t guarantee profits.
International mutual funds
Most major mutual fund companies offer international stock funds. Some funds concentrate only in one geographic area, such as Asia or Europe. Others concentrate on large companies while offering separate funds to focus on smaller companies. (International funds invest outside the United States, while ``global’’ funds may also invest in U.S. companies.) It’s important to read the prospectus of each fund to see the allocation of money to different countries and areas of the world.
Just as with diversified U.S. mutual funds, these portfolio managers try to beat the popular market averages. When you purchase a no-load (no commission) fund directly from the fund management company, the purchase price you pay is based on the net asset value of the fund. That is the price determined at the close of business each day by totaling up the market value of all of the fund’s investments and dividing by the number of fund shares outstanding.
Every year, you’ll pay management fees - usually about 1.5 percent - which are automatically deducted to cover the cost of salaries, research, mailings, etc.
For more information on no-load international mutual funds and their performance records, check online at www.morningstar .net or read any of the quarterly surveys of mutual fund performance in popular business magazines at libraries.
Closed-end country funds
There are many closed-end country funds listed on the New York Stock Exchange. Each fund is a fixed portfolio of companies that represent the stock market of a specific country. For example, you’ll find listings for the Austria Fund, China Fund, France Growth Fund, Germany Fund, Italy Fund, Malaysia Fund and others. There are closed-end country funds listed for every major developed and emerging country in the world.
When buying a closed-end country fund, you simply put in an order with your stockbroker. Since the shares probably are listed on the New York Stock Exchange, you’ll pay whatever commission you’ve negotiated with your broker. There are a fixed number of shares outstanding and available for trading, just as with other listed companies, so buyers and sellers are matched at a price by the specialist on the exchange floor.
There is one catch to trading these listed closed-end funds: The price you pay for the fund shares usually does not exactly reflect the value of the stocks held in the fund’s portfolio. Sometimes the shares of the fund itself may trade at a premium to the intrinsic value of the portfolio investments, and sometimes the fund shares may trade at a discount to the investment value, or NAV. Those premiums or discounts are affected by market sentiment. When a market gets hot, the discount may narrow. So, if you buy a country fund at a large (perhaps 15 percent) discount to its intrinsic NAV, you could profit in two ways: the shares could rise, and the discount could narrow.
For more information on closed-end country funds, ask your broker. Or contact a Salomon Smith Barney representative for the latest issue of its closed-end country fund report.
WEBS - country indexes
Perhaps the most efficient way to invest in a country is to purchase an index of that country’s major stocks. Just as you can buy an index mutual fund based on the Standard & Poor’s 500 in the United States, there are index funds for the major foreign countries. These funds are called WEBS (World Equity Benchmark Shares). They’re sort of a combination of the features found in open and closed-end funds.
As an investor, the most important thing you need to know is that these country WEBS are traded on the New York Stock Exchange, where you can track their price performance. Each WEB unit tracks the actual MSCI (Morgan Stanley Capital International) stock index for each country. While the foreign markets are open and trading, the price of the WEBS shares listed in the United States changes instantaneously to reflect changing market and currency conditions.
If there were a differential between the WEB value and the actual shares in the index, huge securities firms would ``arbitrage’’
(trade between) those valuations to make a profit. So WEBS always reflect fair, real-time prices. They represent a diversified, balanced opportunity to invest in the financial markets of each country.
For more information on WEBS, check online at www.
websontheweb.com, or call (800) 810-9327.
Terry Savage is a registered investment adviser for stocks and commodities and is on the board of directors of McDonald’s Corp. and Pennzoil Co. You can send her questions via e-mail at email@example.com. Her second book, published by HarperCollins, is Terry Savage’s New Money Strategies for the ‘90s. Copyright Terry Savage Productions.