Investors Take a Chance on Foreign Funds

PLAYING the international stock markets used to be only for the astute and deep-pocketed. Now the burgeoning number of international mutual funds has brought both traditional overseas markets like Europe and Japan, as well as more exotic ones such as Poland, Morocco, and Indonesia, within reach of the average investor.

Ten years ago only a handful of international mutual funds - those which invest exclusively in overseas markets - were available. Today 200 such funds are offered - some single country funds, others more diversified. Investment risks

The rewards of the international market can be great, but so can the risks. Japan-focused mutual funds, for instance, have grown almost 23 percent this year as Japanese stocks jumped 30 percent in value in anticipation of a major rebound in the economy. But the three-year return through May 20 on Japan funds was a dismal -12.8 percent, according to Lipper Analytical Services in Summit, N. J.

To listen to Lipper's president, Michael Lipper, explain the risks involved in international investing could make even the most adventurous wary. He lists currency risk, interest rate uncertainties, protectionism, political instability, commodity price risk, environmental risks. Many of these variables are also part of the investment environment in the United States. The difference, he says, is that people are more accustomed to dealing with them here.

Currency fluctuations are perhaps the greatest challenge. "Foreign currency is the bane of all foreign investors' existence," says Jim Hawks, president of Eaton Vance's Greater China Growth Fund. "The volatility of currencies can totally swamp the underlying investment performance in the local market."

One of the more startling examples of this was the spectacular growth of the Brazil Fund, which rose 14,600 percent over a two-year period. As the Mutual Fund Forecaster points out, the gains were "all but wiped out by concurrent losses in the value of the Brazilian cruzeiro."

Thus the dollar's value can make or break a foreign fund's earnings. In the early 1980s when the dollar was riding high, international funds earned only three-fifths as much as domestic ones. That was followed by three years of weak dollars when international funds soared past those invested in the US. Since 1988 the dollar has been flat. If all three periods are combined, the average international fund rose 13.9 percent a year, while the average US fund rose 12.8 percent.

Some regions are less susceptible to currency changes. In the China region, currencies track the dollar more closely than in Western Europe or Japan.

Single country funds tend to be more volatile than regional funds. But even investing in broader geographical funds is no guarantee. In the 12 months through May 20, European funds dropped 6.56 percent while Latin American funds were down 14 percent. Third-world funds

Some of the fastest growing funds are in the developing world. As third-world countries crawl out from under their debt burden and crank up economies, 6 or even 8 percent growth is not uncommmon, particularly in Southeast Asia. The International Monetary Fund's recent recalculation of countries' economic size ranked China next to Japan. With growth last year around 12 percent and holding steady this year, China's economy will overtake its neighbor's by year-end and be second only to the US.

Boston-based Eaton Vance mutual fund company hopes to harness some of that potential with its Greater China Growth Fund. The six-month-old fund has 7 percent of its portfolio in Chinese stocks. The remainder is in companies around the region - Hong Kong, Singapore, Malaysia, Taiwan - with significant business interests in China. China's two securities exchanges each have about 18 companies listed. Few have track records and the accounting is not reliable, says Mr. Hawks, explaining the small amount inves ted in China itself.

Pioneer's new International Growth Fund takes a different tack. The six-week-old fund shuns indexes as guides and scopes out opportunities irrespective of market size. Although Japan comprises almost half the international market in terms of stock value, the fund holds no Japan stocks. Too expensive, says portfolio manager Norman Kurland.

Mr. Kurland urges investors to put 30 to 40 percent of their money overseas. "There's enormous risk to having all your stocks in the US market," he says.