Offshore Funds: The First Shall Later Be Last

With markets flip-flopping, the lagging funds of 2000 are this year's first-quarter leaders

No one could blame investors for concluding that the market gods have manic-depressive tendencies. Anyone with money in global stocks last quarter has reason to think the deities are schizophrenic, too--how else to explain the markets' wild flip-flops? Asian bourses, anathema at the end of 2000, topped the charts in the first quarter. Taiwan, boosted by (of all things) the tech sector, outperformed every market in the world with a 22% rise in the benchmark Taiwan Weighted Index.

From January through March, the JF Taiwan Trust, the Schroder Taiwan Fund, and Fidelity Funds Taiwan took the No. 1, 2, and 3 slots in BusinessWeek's quarterly Offshore Fund Scoreboard, which tracks the performance in dollar terms of the 500 biggest equity mutual funds for retail investors domiciled outside the U.S.

Last fall's hot ticket, European small-cap funds, lagged all winter, tainted by association with technology, telecom, and the Net. The Fleming Frontier European Discovery Fund, BusinessWeek's top fund of 2000, which rose 155.7% for the 12 months through Oct. 2, 2000, was No. 392 in the first quarter, with a 19.1% fall. (Our data, available at, is from Standard & Poor's Micropal, like BusinessWeek a unit of The McGraw-Hill Cos.) Tech funds, including several European specialists, monopolized the bottom 25, which fell between 34.42% and 52.87%.

The best-performing European fund, the MSDW Sicav European Property I Fund, lost 1.6% in the first quarter (in euros, it rose almost 5%) after a 12-month gain of 11.68%. The fund, which invests in publicly held real estate companies, is something of a lagging indicator, says Theodore R. Bigman, the Morgan Stanley managing director who runs its global real estate portfolio. Demand for office space from the tech and finance sectors "may have peaked in 2000 and may be winding down," he says.

What lesson is the beleaguered investor to draw from the offshore funds' motley scores? The 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 their performance and strategies speak to investors anywhere. Eternal market verities seem more apropos than ever: Diversify, and weigh your zeal for risk. Emerging markets and emerging companies aren't for the buy-and-hold set.

A squint at Asia's recent effervescence is useful. Sixteen of the top 25 funds in the first quarter were Asian. But most were down 40%-50% for the 12 months ended Apr. 2. And the five-year retrospective isn't pretty. The average annual return of the top two Taiwan funds was only about 8%. Contrast that to the five-year performance of the Scontinvest North American Equity Fund, which focuses on U.S. blue chips. It ranked 15th in the first quarter, with a 0.01% decline. Those who bought it five years ago, however, have banked a meaty 17.5% average annual return.

BANK BETS. Undeniably, Asia's markets were tempting when others were soggy. Local phenomena kept them afloat: The ouster of Philippines President Joseph Estrada on corruption charges was a boon, as was enthusiasm for Taiwan's competitive electronics makers. Asian fund pros say they'll keep buying defensive shares--banks, consumer-goods, and rapid-transit companies. Mark Mobius, president of Templeton Emerging Markets Fund, insists it's time to nibble at Southeast Asia. "These markets look very appealing if somebody wants high risk and high reward," he says, noting that a small influx of foreign cash goes a long way in such shallow markets. He thinks that Thailand's Bangkok Bank PLC and Thai Farmers Bank PLC merit a new look for cleaning up their accounts and recapitalizing.

Robert Conlon, chief investment officer at Investec Asset Management Asia Ltd. in Hong Kong, says Kookmin Bank, Korea's largest retail lender, is a buy. It's due to merge with H&CB, Korea's most profitable bank.

A DANGEROUS TIME. But there's still the risk of a nasty chill from the U.S. Add to that Japan's dismal outlook: The Nikkei skirted 16-year lows last quarter. A falling yen could spark competitive devaluations, hurting returns in foreign currencies. Another market flash point is the bellicose tone of U.S.-Chinese relations, in which Taiwan is a bone of contention.

The first quarter was a stockpicker's market. Two Latin America plays, for example, were in the top 25: The ABN Amro Latin American Equity Fund, No. 19 with a 2.06% drop, and MSDW Sicav Latin American Fund, No. 25 with a 3.76% dip. The IFC Latin America Index, by contrast, fell 5.1%. In the first part of the quarter, the index took a hit from concern that the U.S. slowdown would hurt Mexico. Then the anxiety switched to the spillover of Argentina's economic problems into Brazil.

Luiz Ribeiro, who manages the ABN Amro fund, likes consumer companies that "depend on internal fundamentals rather than the mood in other markets." Brazil's 4% projected growth for 2001 augurs well for the sector. He likes brewer AmBev, which is down a bit in 2001 but up 39.7% over 52 weeks. "It has had great performance, and it still has more to offer," he says.

In Mexico, Ribeiro likes Banamex, the No. 2 bank. Banks are emerging from a six-year crisis. "If you see a recovery in purchasing power, you should see loan growth and fees for services like asset management," Ribeiro says.

In sum, a global crisis--or a host of market deities in need of therapy--demands a focus on good companies.

By Julia Lichtblau in New York, with Frederik Balfour in Hong Kong, Brian Bremner in Tokyo, Elisabeth Malkin in Mexico City, and Sharon Reier in Paris

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