With interest rates on U. S. CDs and bonds continuing to slide, some investors are doing more than look enviously at countries where rates run higher by 50% or more. By putting their dollars into a growing number of income funds that invest in short-term instruments in Europe and elsewhere, they're aiming for yields of 8% and better.
That kind of potential attracted $140 million to Fidelity's new Short-Term World Income Fund in just the past two months. A similar Scudder fund begun last March has ballooned to about $280 million, and one that Blanchard started in January has hit the $1 billion mark. Investors in such funds look for higher yields, and perhaps a boost from a weakening dollar. "These are good investments right now," says Walter Frank at IBC/Donoghue, which tracks fund performance. "And they should be good for the next several months -- until U. S. interest rates head up and rates overseas start coming down."
RISKY RATES. Most of the new funds are no-load, unlike the pioneering Alliance Short-Term Multi-Market Trust, which has grown to $7 billion since 1989, or Merrill Lynch's $6 billion Short-Term Global Income Fund began a year later. While some of the funds let you write checks, as you can with a money-market fund, they lack a money-market fund's safety because they involve both interest-rate and currency fluctuations.
The funds try to minimize interest-rate risk by sticking to short-term investments, nothing more than three years and usually considerably less (table). But a more important safeguard is the portfolio mix. Funds heavily invested in countries such as Australia and New Zealand whose currencies are likely to weaken against the dollar, are probably not good bets. Most funds try to reduce risk caused by currency fluctuations with some complex hedging strategies and by diversifying their portfolios widely. For example, when Finland recently devalued its currency by about 10% against the dollar, it affected Scudder's Short Term Global Income Fund, where Finnish instruments make up 7% of its portfolio. But Portfolio Manager Adam Greshin points out that 15% is in U. S. instruments, 12% in Denmark's, 11% in Mexico's, and so on: "All in all, we're in 23 countries and 9 different currencies, so the $12 share price dropped only about 7~."
So if you hop on a fund for richer returns overseas, don't get rattled by the daily headline from any one country. But keep one eye on month-by-month moves in the share price, the other on the width of the gap between interest rates at home and abroad.
REACHING FOR RICHES ABROAD Fund Yield Minimum Average Percent investment maturity BLANCHARD 9.4 $3, 000 29 mos. FIDELITY 8.0* 2, 500 13 mos. SCUDDER 9.7 1, 000 16 mos. * In fund's first two months DATA: BW