Learning To Say `Anxiety' In 100 Languages

Foreign funds have been hit hard, but there's no mass exodus

Honeymooning in Bermuda in October, Sandy Nairn made the mistake of leaving his poolside chaise to return for a moment with his bride to their suite. There, the director of global equity research for Franklin Templeton Funds learned stock markets worldwide were plunging. "I had an afternoon of watching the Dow go down 550 points," Nairn laments. Now that he's back at work in Edinburgh, the Dow is the least of his worries. Global markets remain unsettled. And foreign funds--those that invest only outside America--have been taking a beating.

The average foreign fund, up 13.8% this year through September, shed nearly two-thirds of those gains by Nov. 7 (table). And while some country funds, including those in Russia and Mexico, remain up for the year, many emerging market funds have been particularly hard hit. Perhaps in response, investors for the first time since 1995 have begun taking out more money from international stock funds than they put in.

How badly an international fund did stemmed first from how much of its portfolio was invested in Japan and Southeast Asia, especially Hong Kong. Another negative was how much a fund had in big European multinationals that tanked in October. For example, Richard H. King, whose Warburg Pincus International Equity Fund held a relatively big position in Southeast Asia and a smaller one in Europe, went from a total return of 12.4% for the year on Sept. 30 to -1.1% by Nov. 7. Or consider Helen Young Hayes. Her Janus Overseas Fund has 66% of its portfolio in Europe and 13% in the Pacific Rim. Even with that, her fund's 1997 return slipped from 25% at the end of September to 17.9% as of Nov. 7.

Veterans such as Martin G. Wade, who has guided T. Rowe Price International Stock Fund since 1980, worried that investors would redeem shares en masse. He was pleasantly surprised. "We did have a few days [of net redemptions], but not a mass, panicky exodus at all," he says. "We didn't have to sell anything to handle the redemptions." But Robert Adler, whose Arcata (Calif.) AMG Data Services tracks mutual-fund cash flows, says redemptions have clobbered emerging-markets funds aimed at Asia and Latin America.

MURKY VIEW. The question now is whether investors will lose faith in the concept of global diversification and patience with the bigger, broader foreign funds. Money managers hope that won't be the case. Yet there's no consensus on where the best values now lie. "These are not easy markets," says Richard R. Foulkes, manager since 1981 of Vanguard International Growth. Even so, Franklin Templeton's Nairn sees good values for careful stock-pickers, particularly in Thailand. Harry Hartford's highly rated Hotchkis & Wiley International Fund has made a few recent buys in Hong Kong, but the region's battered markets don't tempt him much, given the murky outlook for corporate earnings. Other managers are even less willing to test Asia's shaky markets. T. Rowe Price's Wade, with 55% of his chips on Europe, thinks it remains the safest bet, with some opportunities in Brazil and Argentina. "No cavalry charges into enemy lines," he says. Wade has only a few holdings, including Canon Inc., in Japan, which he says is still "heavily overvalued" despite falling 20% in 1997.

Not so, says Andrew S. Adelson of Sanford C. Bernstein's International Value Fund. His fat, 30% allocation to Japan has hurt him this year. Yet he's steadfast. Big exporters, such as Fuji Photo, Matsushita Electric, and Makita, offer what he calls "world-class products," strong balance sheets, and stock prices barely over book value. Particularly for old-line Japanese manufacturers, he thinks book values are understated, partly because their longtime holdings of other companies' stock are still carried below market value. "If you did an analysis of their book values," he says, "you'd walk away and say: `Wow!"'

But few investors are willing to do that analysis. Until their overseas bets start paying off again, "wow!" will be about the last word on investors' lips.

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