The Mutual Fund Party Gets Hotter In Asia

Among offshore funds, China is hopping. Europe still lags

As Asia's stock market boom rolls on, investors are casting their nets wider in the region. While plowing money into Thailand, Korea, Taiwan, and Japan, mutual-fund investors also are diving into China. In dazzling second-quarter performances, three offshore equity funds investing in China ranked among the world's top 10 performers. "The economy is turning around for every country in the region," says Brian Gendreau, an emerging-markets strategist at Salomon Smith Barney Inc.

Asian funds weren't the only ones hopping. Latin American funds sizzled, too, as Mexico's growing exports to the surging U.S. and recovery in places such as Brazil cheered investors. But European funds recovered only slowly from their disastrous first quarter, brought on by a weak euro. Had the currency not dropped 15% so far this year, some might have shown double-digit gains.

BUSINESS WEEK's Offshore Fund Scoreboard shows that plenty of global markets are beating Wall Street. Offshore funds don't file reports with the U.S. Securities & Exchange Commission and are marketed only outside America. But their performance reflects decisions and actions by U.S. and international investment pros. We track the world's 500 biggest equity funds quarterly, using data from Standard & Poor's Micropal (like BUSINESS WEEK, a unit of The McGraw-Hill Companies). The latest performance data on these and other equity and fixed-income funds are available at

GREAT OPTIMISM. Nowhere is optimism greater than in Asia, where the rebound from the crash of 1997 is still going strong. Forty-three of the top 50 performing funds invest solely in the region. Eight specialize in China, including the top-performing HSBC GIF Chinese Equity fund, which far outdistanced the pack with a gain in the quarter of 80.41% in U.S. dollar terms. The $78.1 million fund lost nearly 14% in the first quarter. Unless tensions between China and Taiwan escalate and scare off investors, the Bank of China's enthusiasm for low interest rates and hikes in the money supply should keep the money flowing.

For sustained gains it has been hard to beat Thai and Korean funds lately. Fidelity Funds Thailand, with a 62.71% gain in the quarter, was up more than 164% in the year through July 1. Fidelity Funds Korea, up 61.17% in the quarter, soared nearly 238% year over year. More benign monetary policies by the Bank of Korea, which is keeping interest rates at historic lows to spur growth, get much of the credit. But corporate restructuring is also helping. Despite foreign skepticism about restructuring, "there seems to be enough momentum, and it should continue," says Keith Ferguson, Fidelity's chief investment officer for non-Japan Asia.

Japan, too, is benefiting from investors' enthusiasm for the region. Three of the top 17 funds invest in Japanese smaller companies and made substantial second-quarter gains of 40% to 45%, though a bit down from the frenetic 45% to 64% pace in the first quarter. Credit the continuing influx of foreign capital into innovative new companies. "Liquidity, attractive valuations, and the appeal of `new Japan' stocks have been the major factors," says Robert Burghart, a small-cap strategist at ING Barings. Although the Japanese OTC market, where smaller stocks trade, is notoriously volatile, Burghart maintains that earnings for many of the stocks listed there could grow as much as 40% in the fiscal year through March.

The biggest worry is that corporate chiefs in Asia will grow complacent. Markets could easily go into reverse if Japanese corporate heads, in particular, don't implement announced restructuring plans. Electronics giants Sony and NEC, for instance, excited investors with promises of cost-cutting over several years. "We need to make sure those aren't just hollow words," says Douglas M. Wilde, a global investment strategist for Merrill Lynch & Co.

In parts of Europe, meanwhile, investment prospects finally are looking up. With the Kosovo conflict--and possibly the sharpest declines in the euro--now over, investors have bid up many German funds. DekaLux Deutschland, for example, though still down nearly 10% from a year ago, is up 7.36% for the quarter. Fund manager Trudbert Merkel made gains in cyclicals such as Bayer and BASF and in electronics companies such as Siemens. Now, as Germany cuts taxes, "the German market will perform better than much of Europe in the third quarter," predicts Merkel.

French fund managers, too, were hard hit by the euro's decline. The currency's slide favors exports, but gains in stocks are being lost in currency translations. In local currency, the CAC 40 index is up nearly 50% since last September, but in dollar terms, fund performances look poor. While the euro could dip below parity against the dollar, says fund manager Edouard Pechon, "I wouldn't imagine that the euro would go much lower." His Dexia Equity L. France C fund was up 4.32% in the latest quarter and 2% higher in the year.

"A LOT LESS SEXY." Despite the worries, many analysts say Europe's darkest days are behind it. Consumer confidence is rising and the end of the Kosovo conflict should trigger some lucrative rebuilding. What's more, exports should rally as Asia and emerging market economies rebound. "We do think we see a turn in the second half of this year and into 2000," says Joseph P. Quinlan, a senior international economist with Morgan Stanley Dean Witter. One difficulty: Some investors don't see how Europe can catch up with the roaring U.S. Warns David Bowers, London-based European equity strategist at Merrill Lynch: "Even if Europe does take off in autumn, some say it is a lot less sexy than some of the new technology players in the U.S."

The problem of getting overlooked is especially acute in small countries. Some of the biggest losers last quarter were funds specializing in Belgium and Switzerland. The problem is that insurers and other big institutional investors have broadened their holdings across Europe and are giving short shrift to smaller countries, says Jean-Paul de Lauw, fund manager at Belgium's KBC bank. His EMIF Belgium Index Plus B fund is down 7.43% for the quarter and is 12% lower in the past 12 months. "If you say I am not very optimistic, that is an understatement," says de Lauw.

Swiss funds are weighted heavily toward pharmaceutical companies such as Novartis and Roche Holding, whose shares have been weak. In addition, the local economy is lagging behind others in Europe. While the economy is expected to quicken later this year, "it is still fairly weak," says Fidelity portfolio strategist Andreas Kuschmann.

Britain has been another big disappointment. The 27 funds we track there together posted a paltry 0.28% gain for the quarter, barely managing a 1.73% gain for the year. But the flat showing, which follows hefty first-quarter gains, could improve this quarter if earnings reports prove upbeat. Further, British companies are well placed to weather a U.S. slowdown. British companies "are very well positioned to capture market share if the U.S. slows down," says Ketan Raja, fund manager for Investec Guinness Flight UK Fund. For the quarter, his fund is up only 0.9% and is just 0.77% higher for the year.

Elsewhere, the most surprising bounce came in Latin America. The seven funds that BUSINESS WEEK follows there gained an average 14.48% in the quarter. The main drivers are Mexico, largely because of its ties to the U.S. economy, and Brazil, which has impressed investors by managing to avoid the chaos that was feared after its devaluation in January. "Macro fears kept people out of the market, but we were paying attention to stocks. They are cheap," says Grace Pineda, senior portfolio manager for emerging markets at Merrill Lynch Asset Management. Her fund, the Merrill Lynch Latin American Portfolio O fund, climbed 14.54% in the quarter.

Just how long investors will remain intrigued with Brazil, though, is unclear. While low inflation and falling interest rates are helpful, analysts say fiscal reform is still needed. "Nobody believes the structural problems will be addressed," warns Pineda. "People are very dubious about the high debt levels." Low valuations on Brazilian telecoms and utilities appeal to ABN AMRO Asset Management senior portfolio manager Luiz Ribeiro. Still, he says he might reduce Brazil's overweight position in his Latin American Equity Fund if he doesn't see more action on fiscal reform.

Investors in most places around the world are finding a lot to cheer about these days. Wall Street's long bull run may grab newspaper headlines, but global investors outside the U.S. are finding that America doesn't have a monopoly on making money.

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