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Strengthened yen adds to lure of foreign stock


Like many other mutual fund investors, you probably have long believed that you could enhance the return of your growth-oriented portfolio -- and moderate its volatility -- by owning at least one foreign stock fund.

But you probably have found it hard to cling to this belief since 1989 as the U.S. stock market outperformed the average of major foreign markets in U.S. dollar terms -- until this year.

While the U.S. market, as measured by the Standard & Poor's 500 Index, had a total return of 4.9 percent in the first half, Morgan Stanley Capital International's Europe, Australia and Far East (EAFE) Index had a total return of 15.9 percent in local currencies.

Thanks largely to the strengthening of the Japanese yen, the EAFE Index's return became 23.5 percent when translated into U.S. dollars. The Japanese stock market, which accounts for nearly one-half of the value of all stocks in the 20-country index, had a return of 41.7 percent in the six months. (It was 20.0 percent in yen.)

If you've stayed with your foreign stock fund, you may be DTC encouraged by the data -- even if your fund didn't do as well as the EAFE Index this year -- and want to buy more shares. If, on the other hand, you switched out of such a fund or haven't yet invested in one, you may be eager to choose a fund.

Despite the gains already made in 1993, the case for investing in funds concentrated in foreign stocks remains strong. That's not only because of speculation that the U.S. market may experience a correction, or because the EAFE Index beat the S&P; 500 over the last 10 years even when the poor performance of 1989-1992 is taken into account.

Just as our market has performed splendidly since the cyclical low at the midpoint of the 1990-1991 recession, other markets should benefit as economic recovery spreads overseas. Growth rates around the globe are likely to exceed our mature economy's over the long run, lifting foreign stock prices.

To profit from these trends, you can choose among several types of equity funds: international, which invest primarily in foreign securities; global, which also own U.S. securities; and those concentrated in single countries or regions.

If you want geographic diversification to mitigate risk and are adequately invested in the United States, focus on international funds.

To choose one you'll be comfortable with, watch for differences in policies that can -- and do -- lead to differences in performance:

* Whether they're only in the major markets represented by the EAFE Index, only in more volatile emerging markets, or in both.

* How assets are distributed among countries. Given Japan's importance, note the percentage of funds invested there.

* How aggressively they use hedges against the risk that the dollar will appreciate against other currencies.

* Whether their stock selection emphasizes high earnings growth rates or low prices relative to perceived asset values.

* How aggressively managers turn over portfolios, incurring transaction costs that are usually higher abroad than in the United States.

Even when funds are run by the same portfolio manager, as in the cases of Harbor International and Ivy International funds, both managed by Hakan Castegren, there can be differences in performance.

The major reasons? The timing of the Harbor Fund's inception, just after the October 1987 stock market crash, when Castegren could buy shares at depressed prices. Another factor is the differences in timing and volumes of cash flows, especially share purchases, between the no-load $1.4 billion Harbor Fund and the $123 million Ivy Fund.

These and other leading five-year performers, which warrant a look, illustrate how geographical mixes vary among funds.

Castegren, for example, has been close to 20 percent invested in Switzerland, whose market accounts for only 4 percent of the EAFE Index, but less than 10 percent in Japan.

T. Rowe Price International Stock Fund also is over half invested in Europe -- led by Britain with 16 percent -- but has over 20 percent in Japan. It has been increasing the non-EAFE share, now 12 percent, because of these markets' faster growth, Vice President George A. Murnaghan said.

G. T. Global's International Growth, which lagged in the last year partly because of its low Japan weighting, is now at 20 percent. It has an even larger position in Britain, however, with almost 30 percent.

GAM International's returns have been boosted by a 20 percent position in Hong Kong, whose market represents only 3 percent of the EAFE Index but which has been one of the index's top performers, and by a large stake in bonds, whose prices rose as interest rates fell.


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