Safe Passage For The Globe Trotting Investor
To yield-starved investors, suffering as interest rates tumble toward 3%, foreign rates look downright luscious. In Germany, short-term securities yield nearly 10%; in Italy, 17%; in Mexico, 16%.
U.S. investors can take advantage of higher yields abroad--and minimize risk--with short-term global income funds. The first was launched in 1989, and now there are 28, with $22 billion in assets.
Don't mistake these for money market funds. Net asset values fluctuate somewhat because of interest-rates swings, but mostly, they move on changes in foreign-exchange rates. On July 20, for instance, the dollar shot up 1.9% against a basket of currencies--and that nicked as much as 0.6% off some funds' NAVs.
These funds now sport yields of over 7%. That's a long way from the double-digit yields paid in many foreign markets. But then, these funds usually hedge much or all of their currency risk. That can cost several percentage points. Also, some funds keep money in low-yield dollar-based securities to dampen volatility. And there are expenses that run 1.34% on average.
So far, the hedged-global-fund concept seems to work, says analyst Anthony Mayorkas of Morningstar Mutual Funds. Look at the Alliance Short-Term Multi-Market Trust, the first of these funds. Class A shares, which started at $9.70, have moved between $9.55 and $10.01 and now trade at $9.69. (Many broker-sold funds have "A" and "B" shares. Class A holders pay a 3% upfront load; B holders pay a 0.5% distribution fee annually, which comes out of interest income.) "Our goal is to beat a six-month certificate of deposit by two percentage points," says portfolio manager Bob Sinche. The fund is now ahead of CDs by nearly four points.
TIGHT SHIP. The no-load Scudder Short-Term Global Income Fund, which has nearly $1 billion, earned a 13.33% total return in the 12 months ending June 30. Its current yield is a bountiful 9.03%, helped by relatively low expenses.
While these funds seem right for investors today, what will happen when U.S. rates move higher than most others? Margaret Craddock, manager of the Scudder fund, doesn't worry about running out of investments: With emerging markets, such as Greece, offering 20% yields, "there will always be new opportunities coming along."
LOOKING ABROAD FOR HIGH YIELDS Fund Current Total Phone yield return* 800- ALLIANCE SHORT-TERM MULTI-MARKET B 7.48 % 7.16 % 227-4618 FIDELITY SHORT-TERM WORLD INCOME 7.92 4.36 ** 544-8888 MERRILL LYNCH SHORT-TERM GLOBAL INCOME B 7.61 7.50 637-3863 PRUDENTIAL SHORT-TERM GLOBAL INCOME B 9.30 8.01 225-1852 SCUDDER SHORT-TERM GLOBAL INCOME 9.03 13.33 225-2470 *Appreciation plus reinvestment of dividends and capital gains for 12 months ending June 30 **Six months ending June 30 DATA: MORNINGSTAR INC., BW