| How to Invest Abroad with Funds |
| Ricky Martin isn't the only import wowing 'em in the United States today. Just look at international stocks. |
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| The MSCI Diversified Emerging-Markets, Japan, and Pacific indexes climbed at least 30% apiece during the first eight months of 1999, while the Latin America benchmark notched a 17% return. The S&P 500, meanwhile, gained a ho-hum 8%. |
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| Maybe you'd like some international zest in your portfolio, too. But be warned: Investing abroad can be like living la vida loca. Oh sure, some foreign funds stick with stable blue-chip stocks from well-developed markets such as Germany and the United Kingdom. But others own stocks of all sizes from developed and not-so-developed markets alike. |
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| Despite the profusion of approaches that mutual funds take, the key to smart foreign-fund investing comes down to one thing: Look beyond returns and Morningstar ratings, and understand how your fund invests. Discover the answers to the following five questions. That'll help you set reasonable expectations for the investment and uncover its hidden risks--and avoid surprises. You can find most of the answers to these questions in a fund's Morningstar® Investment ProfileTM Report. |
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| Does the fund own emerging-markets stocks? Many of the best-performing international funds in 1999 kept a good slug of their assets in emerging-markets stocks. That's not necessarily a bad thing. For starters, funds with heavy emerging-markets stakes offer robust return potential. To wit: The MSCI Emerging Markets index soared 65% in 1993. Emerging-markets funds also better diversify a U.S. stock portfolio than those funds devoted to developed markets. That's because the returns of the U.S. market and other developed markets tend to move in sync. |
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| There's a price for those exhilarating highs and diversification, though: the threat of steep losses. In June 1998, for example, the MSCI Emerging Markets index was in a free fall: It had shed 19% in the preceding six months. If such oscillating returns make you sweat, limit your search to funds that are light on emerging-markets stocks. |
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| Don't assume that avoiding emerging-markets stocks is as easy as shunning any fund labeled "emerging markets," though. Most diversified international funds nibble at developing-markets stocks: In August 1999, the average foreign-stock fund held roughly 9% of its assets in emerging-markets names. Diversified funds that go easy on emerging markets include Vanguard International Growth VWIGX, Lazard International Equity LZIEX, and Janus Overseas JAOSX. |
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| Does it favor some countries over others? Other international funds jostling for top-performance honors this year include those holding lots of Japanese stocks, especially stocks of small Japanese companies. T. Rowe Price International Discovery PRIDX and Schroder International Smaller Companies SSCIX both wedged more than 20% of their assets in Japan at the end of August 1999, and they were both up more than 52% through that date. The average foreign-stock fund, in comparison, held a 13% Japan stake and returned a flimsy 13%. |
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| A good dose of any single country, especially Japan, can deliver uneven results, though. Just witness Japan-heavy T. Rowe Price International Discovery's bottom-quartile performances in five of the years between 1992 and 1999. To stay off the return trampoline, find funds that own stocks from a wide variety of markets. |
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