International mutual funds have taken a dousing this year, hit first by the strong U.S. dollar and then by late October's market upheavals.
The events jolted U.S. investors who were just starting to venture overseas with their fund selections. Should investors return? Should banks help their reentry?
The market turmoil turned up tremendous buying opportunities in many segments of the global market, said Henry A. Frantzen, executive vice president of Federated Global Research Corp. The unit manages 10 equity and fixed-income mutual funds with $1.4 billion of assets.
Mr. Frantzen has spent two decades involved with international money funds, including the College Retirement Equities Fund. In a recent interview excerpted below, he discussed developments and trends on the international investing front.
Why should banks sell international funds?
To exclude international is like offering investments in the alphabet only as far as the letter M. Twenty years ago, U.S. stocks represented 65% of available shares worldwide. Today that's almost flip-flopped, with international stocks accounting for over 60%.
Put another way, just a few years ago, 3% went into foreign investing. It's probably over 10% by now and continuing to grow on the retail side. The same is true for pension funds, which are becoming more interested in international stocks and bonds.
Historically, international funds have performed quite well. They offer diversity because economies do better at different times. If domestic markets are overvalued, it could be a good to go somewhere else.
Isn't a lot of foreign profit driven by U.S. consumers who buy imported goods?
Exactly. So doesn't it make sense to share in the fruits of your own consumption?
How many banks are selling international funds?
The majority at this point appear to be offering global and international funds through broker-dealer and trust departments. We offer funds under our own name and we're also looking into private labeling.
What are the challenges to banks selling international funds?
A lot of people still need to be educated about international investing and its benefits. For instance, currencies go both ways and over the long term they have added to returns rather than detracted.
Bank brokers can also remind customers that many of the funds invest in names that would be familiar to them. Various drug companies, auto manufacturers, and other multinational firms are represented.
People should also be made aware of the risks of being in emerging markets; they are more volatile. To minimize volatility, funds can invest in a number of markets. Our emerging markets fund, for instance, culls investments from a minimum of 20 different regions.
Are the fundamentals there despite recent market upheaval?
Definitely. We have low inflation worldwide, as opposed to recent years. We're also seeing lower tariff barriers, allowing companies to more cheaply ship goods from one market to another. These are very encouraging developments and very positive for stocks and bonds on a worldwide basis.
Haven't excesses by some countries positioned them for a fall?
Some areas in Asia had unregulated growth, particularly when it came to lending to finance the growth. Recent events related to currencies in Malaysia, Indonesia, and Thailand exposed the weaknesses. As a result, markets reacted by pulling money out of there.
But we think now that the prices have come down, they have adjusted so that certain markets are cheap again. We now feel comfortable investing in those markets due to a more calmed atmosphere.
What areas are most attractive?
I'm pretty bullish throughout. Even a region like Latin America, which is taking short-term hits, is one of the most attractive markets in the world.
We also like Europe. In general, we've seen a lot of restructuring and lowering of interest on government debt. The privatization of government companies will make them leaner and meaner. Many countries have a private pension system that opens the door to more investing in their stocks and bonds.
What are the future trends for foreign investing?
Smaller-company investing has strong prospects. People feel comfortable about looking at small companies in the U.S. spurred by wanting to discover the next IBM. These kinds of companies do not develop just within our borders. There are many small, very interesting companies overseas that are profitable and growing and still somewhat undiscovered.
Another area is emerging markets. Many areas' gross domestic products are growing faster than ours. For instance, asset prices in many former Communist countries are still relatively low compared to asset prices here.
Also, some areas in eastern Europe are seeing their corporate earnings grow much faster than earnings in the U.S.
If I were an investor, I would say, "Gee, maybe these markets are cheap now and I should diversify."