Bargain shoppers may try on overseas funds

If you are counting on overseas stocks to brighten your mutual-fund portfolio in 2001, you might want to take a deep breath - and do some recalibrating.

The typical international fund lost ground in 2000. International funds tumbled some 16 percent in 2000, based on 1,829 funds, according to analysis by financial information firm Morningstar Inc.

Many overseas funds were hammered because of a heavy dependency on technology and telecom stocks, according to Kunal Kapoor, an analyst with Morningstar.

But an even more common problem was tepid economic growth in many parts of the world, especially in Asia.

According to Morningstar, European funds were off some 6 percent last year; Latin American funds sagged 14 percent; Pacific/Asia funds (excluding Japan) dropped 29 percent; and Japan funds were off a whopping 33 percent.

Yes, among the carnage there were a few winners, such as Longleaf Partners International, Deutsche European Equity, and Oakmark Global. (See chart below.) But they were exceptions.

And gains don't look easy to come by this year either, many market analysts say. The outlook for global growth in 2001 looks challenging at best and somewhat scary at worst.

Yet some investment houses, including MFS Investment Management, in Boston, are modestly optimistic about overseas stocks this year, given their lower valuation levels compared with US equities. MFS also expects solid earnings abroad.

What makes identifying the direction of overseas markets so difficult is continuing uncertainty about the huge US securities market, which tends to have a significant impact abroad.

"The stock market [in general] will not be returning double-digit gains this year," says Cynthia Latta, an economist with Standard & Poor's DRI, an information/consulting firm in Lexington, Mass. "It will be a respectable year, but not a great year."

US economic growth, an important catalyst for global economic growth, will be around 2.7 percent in 2001, says Ms. Latta. But that's the best case scenario. Current evidence suggests unemployment slowly rising, and consumption slipping.

Moreover, there is danger that the US could slip into a recession, although Standard & Poor's DRI does not expect that result, says Latta.

Internationally, growth will not be much better. The prospects look mixed, though certainly not dismal, says Nariman Behravesh, an economist with Standard & Poor's.

Europe looks fairly decent, he says, with the big four of the European Union - Germany, France, the United Kingdom, and Italy - all posting steady economic gains. But growth rates in each case will come in a little less than 3 percent - lower than last year's levels, Mr. Behravesh says.

Investors may want to keep an eye on smaller European countries such as Finland, Ireland, Portugal, and Spain, which have posted hefty growth figures of late, and continue to look promising this year, he says.

The challenge is that slowing economic growth in the US, plus the recent gains in the value of the euro, put European exports at risk. And if the US were to tilt into recession, then Europe could follow, Behravesh says.

Meanwhile, Asian economies "do not look great," he says. "Japan looks bad."

Many analysts are also wary of Latin America funds. For example, questions abound about the extent of economic recovery in Argentina, one of the engines of that region's economic growth. And emerging-market funds are considered riskier than most overseas funds because of currency, accounting, and trade issues.

The good news, says Behravesh, is that "there is some room for [global] economic stimulation," which should help boost local and regional economies. Europe has already begun a round of tax cuts, and the US appears likely to enact some type of tax reduction under a George W. Bush presidency.

Last week's surprise interest-rate cut by the Federal Reserve should also help spur the US economy, experts agree. But to ensure solid growth, and ward off recession, more rate cuts will be necessary, they say.

Most analysts typically recommend that for purposes of diversification, an investor have between 5 and 10 percent of their overall financial assets in overseas equities.

But choosing a fund is a more difficult choice. The consensus view among mutual-fund analysts: Select one with a consistent performance record over time (three years or longer) with the lowest possible expense ratio. The latter point is crucial, since expenses tend to run much higher than for domestic US funds.

Finally, consider a fund with a well-known fund group, so that if the overseas fund were to run into trouble, you could switch over to a US fund, or to a safer bond or money-market account.

(c) Copyright 2001. The Christian Science Publishing Society