Wall Street was sizzling as 1996 drew to a close, but as far as offshore fund investors were concerned, the torrid U.S. stock market was hardly the only place to achieve stellar results. As BUSINESS WEEK's latest quarterly survey of the world's 500 largest offshore equity funds shows, investing in China, Brazil, Britain, and Hong Kong also paid off in spades. Indeed, many global bourses were so strong in the fourth quarter that only one U.S. stock fund, Scontinvest North American Equity, made it into the roster of the top 25 performers.
If anything, the competition is growing even more intense as 1997 gets under way. With the Dow Jones industrials around a record high and many other markets--excluding Japan, of course--rallying strongly, fund managers are looking forward to another healthy year. True, the pros worry that any hike in U.S. interest rates could put a damper on stocks in America and around the world. But increasingly, they argue that many economies and markets are strong enough to withstand such a shock.
ON THE NET. BUSINESS WEEK's quarterly survey of offshore funds, as well as our annual report appearing in the fall, is prepared by Micropal Ltd., a London-based financial information company. Micropal reports total returns, excluding any sales charges, for funds based in such tax havens as Bermuda, the Channel and Cayman islands, Hong Kong, Luxembourg, and Switzerland. Because these funds are domiciled outside the U.S., they do not file reports with the Securities & Exchange Commission. As a result, they are usually not sold to U.S.-based investors. (You can find a complete directory of all 500 funds, including risk-adjusted performance ratings and phone and fax numbers, in the following places: the Nov. 11, 1996, international edition of BUSINESS WEEK, the BUSINESS WEEK area of America Online Inc., and on the Internet at www.businessweek.com.)
The bulk of the funds we survey are denominated in U.S. dollars, and the results of other funds that trade in Deutschemarks, Swiss francs, or other currencies have been converted to greenbacks for the sake of consistency. So the level of the dollar can make a big difference in the returns that funds report. That certainly was the case in the fourth quarter. The rise in the U.S. currency against the Japanese yen and Continental European currencies penalized dollar-based investors by reducing the value of their funds' foreign holdings. With the dollar continuing to strenGThen against most currencies in January--it's at a 47-month high of 118 yen--investors will have to remain on their guard.
Of all 500 offshore funds, the fourth-quarter's winner was the GT PRC fund, a mainland China fund managed from Hong Kong by Billy Chan of LGT Asset Management Ltd. With a total return of nearly 36% after fees, the fund beat the Standard & Poor's 500-stock index by a factor of more than four. Chan also manages another strong performer, the GT Hong Kong fund, which racked up a return of 17% in the quarter as the territory's market hit several record highs.
Chan's China fund benefited mightily from strong rallies in Shanghai and Shenzhen, which took off last fall amid signs that Chinese authorities were finally loosening their tight-money austerity program and that earnings would rebound. Even sharp corrections in the markets in mid-December, when Beijing threatened to crack down on domestic buyers of shares legally reserved for foreign investors, failed to slow the fund down for long. Chan says he has focused his fund on dirt-cheap capital-goods producers, "which had been murdered over the past three years" by tight money. Chan is also high on infrastructure companies and a few "red chips," which are Hong Kong-based companies controlled by Chinese ministries or provincial governments. Among his top red-chip picks: Ng Fung Hong, a food distributor; Guangzhou Investment, a manufacturing and trading company; and Silver Grant International Industries, a securities and real estate group.
Chan is a fan of Hong Kong, arguing the benchmark Hang Seng index will climb some 10% in the first half of 1997 to pass 15,000 for the first time ever. So he is buying property stocks in the territory, as is Douglas Eu, manager of the JF Hong Kong Fund, another leading performer. To be sure, Eu is getting a little jittery over further growth prospects for developers of luxury residences, given their sharp gains in recent months. So Eu is sticking to such quality names as New World Development and Cheung Kong (Holdings). Says Eu: "If you're optimistic about Hong Kong, then what you're really saying is you're optimistic about property and banks."
BLUE CHIPS. Eu's top banking recommendation is HSBC Holdings, owner of giant Hongkong & Shanghai Banking Corp. and several other big lenders in Britain and the U.S. Despite HSBC's strong earnings, Eu argues that the bank's shares have been penalized by overseas investors who are too pessimistic about the effect of the handover of Hong Kong to Beijing on July 1.
HSBC, which trades in London, its legal home, as well as Hong Kong, is also a favorite of Garry Mackenzie, director of international equities at London's Clerical Medical Investment Group. His CMI GNF U.K. Equity fund tallied a respectable return of nearly 15% in the quarter. But Mackenzie is equally bullish on the outlook for his more immediate surroundings. Even allowing for the chance of further Bank of England interest-rate increases in the second quarter, Mackenzie still sees British gross domestic product growth hitting a robust 4% this year. And while he thinks the strong pound will hurt the earnings of some exporters, he has been loading up on such blue chips as British Aerospace, Shell Transport & Trading, and Abbey National, a big mortgage lender that's benefiting from a resurgent housing market.
Like many investors, Mackenzie assumes Conservative Prime Minister John Major will be beaten by Labor contender Tony Blair later this year. But the prospect of Britain's first Labor government in 18 years leaves Mackenzie unworried. "If [a Labor victory] hasn't been totally discounted, it should be," he says. "Labor has taken a `softly, softly' approach. For the most part, they've done a credible job selling themselves to financial markets."
Although Britain funds scored high in the quarter, few Continental European funds made it into the top ranks. One that did, however, was Credis Equity Small Cap Europe, managed by Carlos Seregni in Zurich. Up 16% for the quarter and 32% for the year, the Credis fund concentrates on lesser-known companies that have "dynamic growth" potential, Seregni says. Among his picks: Telepizza, a Spanish take-out pizza chain that's expanding into Poland and Latin America; and Catena, a Swedish group with new management that ditched its real estate interests last year to focus on car dealerships in Finland, Norway, and Sweden. With Catena operating major Volvo outlets in all three countries and claiming 40% of the Nordic car market, Seregni thinks its stock, traded in Stockholm, could easily climb by two-thirds this year.
CHARGED UP. As was the case in our last offshore fund survey in November, a trio of hot-performing Russian funds--Regent Blue, White, and Red Tiger--continued on a tear in the fourth quarter. Restricted to high rollers with at least $100,000 to invest, the funds have risen more than 100% over the past year by sticking to a select group of blue chips. With President Boris Yeltsin surviving heart bypass surgery and his economic reform plans still intact, the funds have climbed an additional 20% since the start of 1997. What's more, "the run is far from over," says Peter EverinGTon, chairman of the Regent Fund Management in Hong Kong. "We could see a 50% appreciation this year."
Another emerging market that is scoring a big hit with investors is Brazil. And why not? Interest rates are expected to fall, and GDP growth could reach 4% in 1997. One fund that bet right on this forecast is Opportunity Brazilian Equities, based in Rio de Janeiro. It posted returns of nearly 26% in the quarter and 68% for the year. The fund's director, Veronica Dantas, achieved the impressive results by sticking to big-cap state companies slated for privatization. One of Dantas' main holdings, the electric utility Eletrobras, climbed 48% in 1997.
But to one veteran fund manager, equally exciting buys can be found on Wall Street, even at the Dow's lofty heights. Marvin Schwartz, a general partner at Neuberger & Berman LLC, picks stocks for the Luxembourg-based Scontinvest North American Equity fund. He believes "there are still a large number of fine companies that sell at very reasonable multiples."
CASH COW. An "old-fashioned value investor" who looks for big names that have fallen afoul of the market, Schwartz started buying luxury retailer Neiman Marcus after a surprisingly slow Christmas selling season knocked its shares from 36 last fall to 24 on Jan. 22. He is also a big fan of Delta Air Lines, General Motors, and IBM. General Motors Corp., he predicts, will soon announce a generous dividend hike and massive stock buyback. And he observes that IBM is selling for only 13 times estimated 1997 earnings and 10.5 times earnings for 1998, even though its cash coffers are overflowing. So rich is the computer giant that Schwartz expects it to buy back 40 million to 50 million of its shares this year after repurchasing 100 million in 1995 and '96.
Moves such as IBM's help make Schwartz an unvarnished Wall Street bull. He believes that U.S. companies will pour some $310 billion into buybacks this year and next. Along with other waves of cash flowing in from retirement accounts and takeovers, he says, stocks should have plenty of room to run.
A few countries where stocks are doing anything but running are Japan, Korea, and Thailand. It's little surprise that funds investing in those markets turned out to be the fourth quarter's dogs. Thai stocks have been held back by rising trade deficits, slowing profit growth, and worries about a currency devaluation. Korea's market has also been rocked by trade problems, plus spreading labor unrest and a profit squeeze on multinationals. And Japan's market continues to be pummeled by a sagging economy, ailing banks, and government deregulation plans that are shaking many protected home industries. These forces have contributed to a 10% decline in the Nikkei stock average since the New Year began.
Even in these markets there may be some hope, however. Patrick Wong, the investment director for Jardine Fleming Unit Trusts, has been nibbling away at Thai property stocks in hopes that there will be a market recovery in the second half. Jung Z. Rhee, investment manager of the Baring Korea Fund, sees a chance for falling interest rates and labor costs fueling a 40% recovery in stocks this year. And while some doomsayers are saying that the Nikkei will drop a further 25% or even more, Fidelity Investments is now purchasing Japanese stocks on the assumption that the plunge has produced some bargains and the worst of the slide is over.
Whether you wish to concentrate your portfolio on last quarter's winners or the world equity market's risky bottom-dwellers, there are mutual funds for just about every interest and appetite for risk. BUSINESS WEEK's offshore fund surveys can help you search for the steady performers--and avoid those whose performances leave much to be desired.