The Global Investor

Ever since President Boris Yeltsin dissolved the Russian Parliament in late September and set the world on edge, Helen F. Hayes, portfolio manager for Janus Worldwide Fund, hasn't been getting much rest. Already weary from balancing the demands of her fund's $600 million global equity portfolio against those of her 10-week-old daughter, Rachel, Hayes, 31, has been staying up night after night in the basement office of her Denver home, phoning brokers in Asia and Europe while keeping "one eye glued to CNN and the other on stock prices" flashing across a desktop monitor.

Hayes's nighttime vigils are hardly surprising. Her fund has big stakes in German and Austrian banks and manufacturers that are especially vulnerable to political tensions only a few hundred miles to the east. But despite Yeltsin's woes, Hayes is continuing to build her overseas holdings as rapidly as she can. "I felt much more sanguine when the armed forces threw their support behind him," she says. "Most of the world is in a declining interest-rate environment, and that's positive for stocks."

DOUBLE YOUR PLEASURE. For investors, the combination of lower interest rates and emerging new markets has been more than enough to overcome the political angst and civil wars bedeviling hot spots around the world. So far this year, Janus Worldwide's 14-member crew of international stock-pickers has served up a healthy 13.5% gain--better than twice the performance of the Standard & Poor's 500-stock index of industrials.

Moreover, the easy pickings on Wall Street may be coming to an end. At a time when many market mavens are wondering whether U.S. equities can continue their record-breaking pace for much longer, many international markets are taking off. And that's forcing many investors to consider a major strategy shift.

Like the thousands of big and small U.S. companies that have expanded to Europe, Asia, and Latin America to generate growth, U.S. investors are now facing the fact that they, too, will have to start investing overseas if they want their portfolios to continue to build wealth. This international shift will force investors to reckon with risks that few have ever had to confront before, from the wide price swings on many bourses to the chance that sudden changes in the dollar's value may wipe out a year's worth of stock market gains.

If history is a guide, the extra trouble will bring superior returns. Indeed, with the U.S. now accounting for less than 40% of the world equity market, investors risk cutting themselves off from some of the hottest prospects if they don't think and act globally. As Nicholas Bratt, president of the Scudder International Fund, puts it: "Why not buy the best companies in the world?"

The global investor is raking it in this year. Emerging markets are delivering double- and even triple-digit gains, reflecting the prospects for dramatic increases in corporate profits as economic reforms sweep the developing world. And across industrial economies, hopes for an end to the world recession are giving bourses from Hong Kong to Frankfurt one of their best years ever.

JAPAN WATCH. Next year looks pretty hot, too. Michael Hughes, chief strategist for London's Barclays de Zoete Wedd Ltd., thinks European stock markets will show a 16% return over the coming 12 months, vs. only 7% for the U.S. Even recession-bound Japan may offer potential for superior growth. While the Nikkei stock average has been stuck around 20,000 for months, and "bearishness on the economy is growing day by day," Merrill Lynch & Co. Tokyo strategist Jeff Bahrenburg thinks that Japanese manufacturers' profits will surge by 50% next year as tough corporate restructuring and record-low 1.75% interest rates ignite a recovery.

Amid such forecasts, U.S. pension-fund managers poured $18 billion into overseas markets in the first half of 1993 alone, according to InterSec Research Corp. in Stamford, Conn. That's nearly as much as they invested abroad in all of 1992.

Individual investors are taking similar steps. Only a few years ago, going global might have required immense amounts of legwork. But a swift outpouring of mutual funds investing in single countries, large regions, and multinational industries--an increasing number of them in the developing world--is making the global investor's life easier. Consumers have been moving more than $1 billion a week into such funds since midsummer alone. They now have $100 billion in funds that invest outside the U.S., up from $61 billion a year ago.

So intense is interest in international equities that even mutual funds that appear to be all-American are gaining a worldwide flavor. Fidelity Investments Executive Vice-President Neal Litvack notes that the group's Magellan Fund, Puritan Fund, and Contrafund, which are largely domestically oriented "have all started buying international securities aggressively" as a hedge against a U.S. market decline. Today, 8% of Fidelity's $200 billion in mutual-fund assets is invested abroad, against less than 5% only a year ago.

Still, U.S. investors have a long way to go before they can proclaim themselves global players. Of the roughly $500 billion in customers' accounts at Merrill Lynch, for example, only 5%, or $25 billion, is now invested abroad. And that's probably costing Merrill's customers big bucks. According to a new study by economists Linda L. Tesar and Ingrid M. Werner of the University of California at Santa Barbara, a global portfolio of stocks would have outperformed a strictly American one between 1970 and 1991 by three-quarters of a percentage point a year. That may not sound like much, but they note that $1,000 invested in the global portfolio in 1971 would have grown to $11,970 after two decades. A thousand dollars in the domestic portfolio would have been worth only $9,810.

Promoting such potential gains, Merrill is now attempting to persuade customers to boost their overseas assets to 7.5% of their portfolios by yearend--and to 20% by the end of the decade. "Look at the world," says Merrill Lynch Asset Management President Arthur Zeikel. "It's a growth business." In fact, money mavens such as Ronald W. Rog , a financial planner based in Centereach, N.Y., now regularly counsel clients to put even more overseas--as much as 30%, generally through mutual funds that invest abroad.

TIME-SAVER. Global stock-picking is also on the rise among individuals. Many big U.S. brokers will now handle individuals' orders for shares on bourses overseas, usually in lots of $25,000 and up. But investors can also go global on U.S. exchanges, too. More than 1,000 companies--from massive British Petroleum Co. to tiny Belize Holdings Inc., the dominant banking group in that Central American nation--now list shares and American depositary receipts (ADRs). Unlike issues traded abroad, these U.S.-listed shares and ADRs, which are certificates that show ownership of equities issued overseas, pay dividends in dollars, saving investors the trouble of converting foreign currencies into dollars every quarter. Dividends on ADRs and global mutual funds may be reduced by foreign withholding taxes. But U.S. investors receive a full credit for these foreign levies when they file their annual income-tax returns.

Enthusiasm for emerging-market ADRs has been sizzling, with billions in issues from Latin America and China flooding the New York Stock Exchange alone in recent months. But companies in the industrial world are also rushing to take advantage of American investors' global appetite. Since listing its ADRs on the NYSE in June, Esp rito Santo Financial Holding, the Luxembourg-based owner of Portugal's newly privatized Banco Esp rito Santo, has seen U.S. investors--most of them individuals--gobble up 30% of its stock. In fact, ADRs for British pharmaceutical maker Glaxo Holdings PLC became the New York Stock Exchange's most active issue in 1992, the first overseas listing to win such status.

NEW YORK, NEW YORK. But now, Glaxo is getting hefty competition. Trading in Tel fonos de M xico has soared since the state phone monopoly was listed on the NYSE in 1991. Over the past summer, Argentina's newly privatized oil company, YPF, joined Telmex by selling $2 billion worth of ADRs. A host of other European and Asian giants are getting ready to list ADRs, too. On Oct. 5, auto and aerospace group Daimler Benz will list ADRs on the NYSE, the first German corporation ever to do so. And with Germany, France, Singapore, and other countries planning multibillion-dollar privatizations of everything from banks to phone groups, even more big regional names are sure to seek U.S. investors' cash.

There's no shortage of major investors willing to take them up on their offers. In recent weeks, for example, Bruce B. Bee, a Denver-based small-company specialist who manages money for pension funds and wealthy individuals, has been snapping up shares of Adelsten, a Norwegian clothing chain. Boasting a 5% yield, a 25% return on equity, and a 400% jump in profits over the past five years, Adelsten still trades at a price-earnings ratio of only 9.5. By contrast, Bee notes, trendy U.S. apparel retailer The Gap Inc. fetches a lofty 22 p-e and has a yield of only 1.3%. Jean-Marie Eveillard, manager of the $1 billion SoGen International Fund, has been buying Randstad Holding, a temporary-employment agency he calls "the Manpower of the Netherlands." Despite Europe's recession, Randstad has managed to earn hefty profits and a 30% return on equity. Yet it trades at a modest p-e of 12--half of Manpower Inc.'s. Global investing can also pay off handsomely because it offers a chance to diversify a portfolio among numerous markets. That decreases the chance that your holdings will be devastated if one or two bourses take a plunge.

The Japanese stock market's three-year-long collapse is perhaps the best example of the way international bourses frequently follow their own destiny. Although Tokyo once ranked as the world's largest stock market, worth $4.3 trillion, the bursting of Japan's speculative bubble failed to sandbag other Asian bourses or deter Wall Street from racing to record highs. Then again, that should hardly come as a surprise. According to International Monetary Fund economists Morris Goldstein and Michael Mussa, global equity markets have shown "no significant increase" in correlation over the past 20 years. In other words, despite a tremendous increase in global financial integration, what happens on one stock market still doesn't have a major impact on another.

That lack of correlation is even more apparent in developing economies. Baring Securities Ltd. Vice-President Stephen J. Batzell notes that some emerging markets actually tend to move in opposite directions from each other. Spreading your portfolio among several markets, some of which may be moving up while others are falling, thus acts as "a shock absorber," says Scudder's Bratt. "I don't care how global a U.S. company is," he adds. "If the market goes down the tubes, the good will get flushed away with the bad."

LOST IN TRANSLATION. To be sure, while global diversification can help insulate one's portfolio from risk, investing abroad can produce its share of surprises. Accounting methods, for example, can differ sharply from country to country, making comparisons of p-e's and book values an exercise in frustration.

Take Daimler Benz. Using German standards, it recently reported a first-half profit of $105 million. But that profit turned into a $593 million loss when the figures were restated along U.S. lines. Why the difference? Daimler agreed not to use "hidden reserves"--undisclosed accounts that German companies can draw on to bolster earnings--as the price of listing its ADRs in the U.S.

Even more important are fluctuations in the value of the dollar. The currency's sharp fall against the yen this year has created a windfall for some U.S. investors, turning a 24% gain in Japanese stocks into a 46% increase when the gains are figured in greenbacks. But the British pound's 1992 devaluation turned a 25% gain for the London Stock Exchange--in sterling--into a modest decline when translated into dollars.

Many currency experts believe that the dollar will strengthen against European currencies as the U.S. economy gains momentum. So quite a few mutual-fund managers are seeking protection against losses on their holdings in Europe by selling the German mark and French franc. But some money managers--especially those who hold stocks for three years or more--prefer not to hedge at all.

They argue that currency swings eventually cancel themselves out. What's more, they insist, hedging can be costly and, by reducing the impact of changing foreign-currency values, can actually reduce the diversification that long-term investors seek by looking abroad. "Longer term, the impact of currencies is rather small," acknowledges Anthony W. Regan, senior managing director at Boston's Putnam Investments and a confirmed foreign exchange hedger. "But shorter term, the impact can be huge."

On top of currency moves, overseas markets--especially ones in developing countries--sometimes suffer huge mood swings that can daunt even the most stout-hearted investor. Take Istanbul. Buoyed by 10% real gross domestic product growth, hopes for a European recovery, and the privatization plans of Prime Minister Tansu iller, Turkey's bourse is up 180% this year. But it didn't get there without some nasty bumps along the way. After soaring 140% in the first six months of the year, Turkey's exchange plunged 20% in the following six weeks--only to do an about-face and charge to a record high. But for thrills and chills, few markets can top Jakarta. After reaching a record high in 1990, the Indonesian market plummeted 60% as rising interest rates sent Japanese investors fleeing. But this year, with rates back down and GDP growth expected to be 7%, Jakarta has become one of overseas fund managers' favorite spots. As Bacelius Ruru, chairman of Indonesia's Capital Market Supervisory Agency, happily notes: "People are coming back."

Because few Asian issues are listed on U.S. exchanges, many investment advisers suggest sticking to mutual funds as the most efficient way to invest in the region's markets. Financial planner Rog , for one, recommends T. Rowe Price New Asia Fund. Indeed, Asia funds are becoming Wall Street's hottest commodity. That's largely because many Southeast Asian countries, despite the recession in Japan and the West, are likely to grow by 10% this year.

Even China, in the midst of an economic cooldown launched by People's Bank of China Governor Zhu Rongji, is likely to expand by 13%. "That's very healthy--and it's fantastic compared with anywhere else," says Peter Soo, Hong Kong-based director of fund management for AIG Investment Corp. (Asia) and chief stock-picker for the Van Eck Asia Dynasty Fund.

To capitalize on China's growth, Boston money manager Thomas M. Claflin II has put some of his deep-pocketed customers' cash into Shanghai Tire & Rubber, an ultramodern tire producer "that's making them as fast as they can." Ek Chor China Motorcycle and Tsingtao Brewing, two other Chinese companies that have gone public recently, have attracted plenty of buyers as well. But AIG's Soo prefers to focus on well-established Hong Kong names that are doing business in China and across Asia. His favorites: Luks Industrial, a television maker and real estate developer that has recently expanded into producing cement and plywood in Vietnam, and HSBC Holdings PLC, the British-based owner of Hongkong & Shanghai Banking Corp. Benefiting from the wide spread between Hong Kong's 1.5% savings-account yields and the 8.5% it charges on loans, HSBC's earnings are soaring. Yet, Soo notes, it still trades at a p-e of only 8.5, vs. 10 for American banking giant J.P. Morgan & Co.

SEXY YET SAFE. While booming growth is heating up the market for Asian regional funds, many investors prefer to spread their risks through mutual funds that buy stocks in a wide range of fast-growing emerging markets. Investors in London can even buy into a developing-markets index fund. Dubbed the Emerging Markets Index Tracker Fund, it's composed of the 110 biggest stocks on a dozen markets from Greece to Brazil to Thailand. With Tracker up 21% since its debut in May, a similar fund may open here in coming months, says Baring's Batzell.

But most investors are likely to prefer funds whose managers roam the world in search of obscure emerging-market stocks. One of them, Templeton Developing Markets Fund, is up 44% this year. Merrill Lynch's Developing Capital Markets Fund has gained 30%. Where has the Merrill fund's manager, Grace Pineda, been this year? "Brazil, Morocco, Portugal, France, Argentina, Peru, Ecuador, Mexico, the Philippines, Turkey, Luxembourg, London, Madrid," she says, adding, "There's a couple more, but I forget which."

Lately, Pineda's travels have led her to Petersburg Long Distance, a Toronto-based company that has won the right to rewire the phone system of Russia's former imperial capital. Pineda also has 10% of the fund's assets in Mexico, which she believes is the world's emerging bargain center. The Bolsa Mexicanos de Valores has been buffeted frequently this year by fears that the U.S. Congress may kill the North American Free Trade Agreement. As a result, it's up barely 5% for 1993. But "even without NAFTA, Mexico can grow in the high single digits over the next 10 years," Pineda contends.

"LEAN AND MEAN." In fact, Mexico, once a global outcast for its crippling foreign debt and dismal economic record, has become a mainstay of many international portfolios. As President Carlos Salinas de Gortari's sweeping economic reforms have taken hold, dozens of companies, including Grupo Simec, which operates a highly efficient steel minimill, have gone public on the U.S. and Mexican markets. Simec ADRs are up 18% since they were listed in July. But many investors gravitate first to Telmex. At 51, its ADRs are trading at only 10 times earnings--about half that of one of its main foreign shareholders, Southwestern Bell Corp.

Telmex is hardly the only Latin issue catching the eye of money mavens. Patti A. Satterthwaite, manager of Fidelity's Latin America Fund, likes Elec- tricidad de Caracas, the power company serving Venezuela's capital, as well as Banco Latinamericano de Exportaciones, a Panama-based trade-finance lender. She is also partial to Brazil, where "companies have become very lean and mean" to cope with years of economic and political stress. Among her favorites: Banco Bradesco, a big lender that boasts "an amazing level of automation."

If emerging markets are capturing much of the headlines these days, it's still the major markets of the industrial world that are garnering most of investors' cash. Anton Fink, a managing director at Bank Gebr d. Gutmann in Vienna, is using Western European markets to play the reconstruction of the formerly communist East. Austria's Maculan, for example, has nailed down contracts--and German funding--to build apartments for Russian soldiers returning home from Poland and Germany. But many other fund managers prefer better-known names. Denver money manager Bee, for one, likes Skis Rossignol, the big French manufacturer of ski gear that has seen its profits double after shifting production to low-wage plants in Spain and Italy. And Janus Worldwide's Hayes is stocking up on Switzerland's SMH, the maker of trendy Swatch watches and pricier timepieces. Hyde expects SMH's profits to soar 20% next year, yet it's selling for just 14 times earnings.

Growth--that's what global investing is all about. From Chinese beer to Argentine oil, an unprecedented array of companies with above-average earnings prospects is beckoning investors. In the volatile world economy, some of these investments may well give sleepless nights to newcomers--and to pros, too. But that's all part of the new global investing strategy: Find the best companies, no matter where they are.

      Not too long ago, you had to be a frenzied globetrotter to find the world's 
      best stocks and bonds. Today, armies of experts are happy to do it 
      for you. Here are some of 
      the pros' top picks: 
       Mexican born, runs closed-end country funds from Israel to South America. 
      Likes utilities and consumer stocks. "In the next five years, we're going to 
      have more money in Brazil than anyplace."
      An eclectic globalist, likes Mexican Coke bottler Panamerican Beverages for its 
      low price-earnings ratio and Germany's Daimler Benz for its 
      "aggressive cost cuts." 
      Made big bucks on yen bonds over the summer and now thinks Tokyo stocks are in 
      for "a very good fourth quarter." But high interest rates may produce European 
      earnings disappointments.
      Watches global cash flows for investing clues. With "European monetary policy 
      easing significantly," likes Germany, Austria, and Spain. 
      Also high on Argentina. Personal 
      favorite: Turkey Fund.
      International bond whiz. "Deflationary forces are pretty strong" worldwide. 
      Biggest holdings in Japan, where inflation-adjusted yields exceed 5%. Also very 
      high on Scandinavia. 
      A China bull who invests through Hong Kong. Despite Beijing's economic 
      clampdown, "China remains the center of it all." 
      Growing wary of investments in Indonesia and Malaysia.
      Long-term stockholder, abhors "flavor of the month" buying. Shunning U.S., 
      Japan, Hong Kong in favor of "big and depressed" European cyclicals. Thinks 
      Africa may be an emerging market.
      TURKISH INVESTMENT             82.6%
      BRAZILIAN EQUITY               52.1
      ASIA PACIFIC                   46.8
      MALAYSIA                       45.5
      MEXICO                         40.2
      CHILE                          37.2
      BRAZIL                         23.1
      *Through Sept. 1. Includes appreciation plus reinvested dividends and capital