Offshore Funds That Stayed Afloat

A value-investing focus dominates this quarter's Scoreboard. Call it your grandfather's strategy

Still picking up the pieces of your investment strategy? The year 2000, with its fourth-quarter collapse in confidence, shook even market veterans. Hip sectors that were supposed to grow forever--high tech, telecommunications, the Internet, everything in the U.S.--went into the tank. Places like Japan and Southeast Asia that were to become great opportunities again gave up the ghost, and investors gave up on them.

Shareholders lost billions in the fourth quarter, but for some the downturn restored sanity to the universe. Sure, the tech-oriented Nasdaq Composite Index fell 33%, and even the broad Standard & Poor's 500-stock index dropped 8%. But comfort investing--like comfort food--is back. Winners in the fourth quarter chose your grandfather's investing strategy: Select sectors and companies with long-term growth prospects. Remember Switzerland, the eternal refuge of the ultra-cautious investor? In dollar terms, its market rose 13% in the last quarter, as measured by Dow Jones Global Indexes. U.S. water companies? Up 13% in 2000. People have to eat, right? European food companies rose 19% in 2000. Those Old Economy stalwarts, utilities and oil companies, were good bets, too.

Fund managers who followed a value strategy turned in some of the quarter's best performances. The top 25 funds in BusinessWeek's quarterly Offshore Fund Scoreboard, which tracks the world's 500 biggest funds outside the U.S., gained between 4.67% and 17.3%. By contrast, the 25 worst performing funds lost between 31.21% and 52.07%. Yes, the fin de siecle giddiness is gone. In 1999's last quarter, the top 25 funds rose between 54.19% and 118.3%. The worst performer still made 3.79%. (Our data, available at, is from Standard & Poor's Micropal, which, like BusinessWeek, is a unit of The McGraw-Hill Companies.)

FERTILE EUROPEAN SOIL. Offshore funds, which are typically domiciled in tax havens, can't market to U.S. residents because the U.S. Securities & Exchange Commission doesn't regulate them. But a look at their performance and strategies can help investors anywhere plan for what promises to be a turbulent 2001.

Europe, where the New Economy arrived late, was fertile soil for Grandpa's investment disciples last quarter. The top performers were mostly Europe funds, with a few sector and global-but-defensive funds thrown in for good measure. A cautious strategy landed three Morgan Stanley Dean Witter & Co. funds in the top 25: MSDW Sicav Global Equity, ranked 8th, with a 9.75% gain; MSDW Sicav European Value Equities Fund, 10th at 9.58%; and MSDW Sicav European Property Fund, 15th with 7.29%.

MSDW's Global fund bet two years ago that Europe would catch up with the U.S. in three areas, its manager Paul Boyne says: shareholder-value improvements, mergers and acquisitions, and share buybacks. Those factors, Boyne explains, helped euro-zone stocks gain a respectable 1.5% in local currency terms.

The MSDW fund managers look for noncyclical sectors "where we have a pricing disagreement with the market," says Maggie Naylor, head of European equities and manager of the European Value Equities fund. "So we went very overweight on consumer goods, and [at first] we suffered. The big turning point was Mar. 10, when the valuations of tech stocks began to break." Naylor particularly likes Groupe Danone and Nestle, the French and Swiss global-food groups. In the past 12 months, Danone shares rose 20% in euros. Nestle shares rose about the same in Swiss francs.

Index investing is an unwise bet today with one exception--Switzerland, where conservative themes are bundled handily in the market indexes. Helen Tivey, who manages the 5th-ranked CICM CB Switzerland Basket fund, one of four Swiss funds in the top 25, says her fund tracks the FTSE Switzerland index of 26 stocks, many of them large food, pharmaceuticals, and financial companies. Falling interest rates should help the latter, Tivey notes.

The fourth quarter was cruelest to New Economy acolytes. Of the bottom tier, 80% were tech or small-company funds. Merrill Lynch & Co.'s Technology Portfolio A and Internet Strategy A funds ranked 495th and 499th of 500. Merrill tech strategist Steven Milunovich says it's still a bear market for tech stocks, though he sees interest in software that's "going to save people money." Internet stocks? Too soon, he says, but survivors eBay, AOL, and Yahoo! may revive in the second half.

It takes a lot more creativity to make money now. Ken Lambden, director of Australian equities for Schroders Investment Management Australia Ltd., manages the Superannuation pension fund, which rose 10% in 2000. Lambden, who avoided tech shares and now likes some entertainment companies, still did well by one profitable Aussie tech stock, Vision Systems Ltd., which makes surveillance and fire-protection systems. The company has a price-earnings ratio of only 9.3 based on fiscal 2001 earnings, according to Deutsche Bank, even after a 230% rise in the share price.

Making money in Australia was a breeze compared with Asia, where investors are still reeling and the bottom isn't in sight. Four Asia funds were among the weakest in BusinessWeek's fourth-quarter survey. In local currencies, Japan's market fell 13%, Korea's 17.7%, and Taiwan's 23%. Hong Kong's 3.5% fall made it a star.

Japan's situation is particularly worrisome. Under pressure from new accounting rules that start Mar. 31, banks are selling shareholdings, says Gary Evans, HSBC equity strategist. Until then, stand back. After that, go for drugmakers and food and beverage companies. Evans' team likes food company Q.P. Corp., whose sales rose 30% in its last fiscal year, and Kirin Beverage, which expects 30% profit growth in the fiscal year ending March 31.

Latin America hands hope lower U.S. rates will boost the region's stocks, which fell hard in the fourth quarter despite good macro numbers from Mexico and Brazil. Luiz Ribeiro, ABN Amro's senior Latin American portfolio manager, says his fund's heavy telecom weighting hurt, though that's one of the region's most dynamic sectors: "The [Latin] telecoms were contaminated by negative feelings about the sector in the rest of the world." Until tech and telecom fly high again, the watchword on the globe's bourses is value.