Pick a country. Any country. Germany could be your strong suit. Either Italy or Austria may prove to be an ace in the hole.
Due to the Middle East crisis and continued economic concerns, shares of single-country funds are selling at deep-discount prices. These vehicles, as their name implies, hold the shares of companies in one specific nation.
The recent apparent bargains contrast sharply to the situation earlier this year, when unprecedented prospects for world peace and free enterprise pushed their prices sky-high. Prices of many of these closed-end funds traded on the New York or American stock exchanges have plummeted from a lofty 70 percent price premium to the value of their underlying portfolios to a 20 percent discount.
"The selling in August was so irrational that I've invested $20 million in single-country funds in recent weeks, using a shotgun approach in which I'm simply buying whole batches of them," said Thomas Herzfeld, chairman of Thomas J. Herzfeld Advisors Inc., Miami, Fla., which specializes in closed-end funds.
Hold on a minute, however. Any investor considering bargain-priced single-country funds must keep in mind that they are most volatile. You accept plenty of risk to try for rewards. They're more often used as trading vehicles than long-term investments. The outcome in the Middle East and the performance of various world economies will be determining factors.
The growth in the number of single-country funds has also served to make existing funds less scarce, less in-demand and, therefore, often less valuable.
Closed-end funds have a set number of shares. Shares trade at a premium or a discount to the underlying value of the fund's assets, depending on supply and demand. An investor must track not only movement of the share premium or discount, but underlying value of the fund assets too.
Consider the Italy Fund, top performer for the first half of 1990 with a 23 percent gain in portfolio value. It was hammered by the Iraqi invasion of Kuwait, its net asset value dropping 14 percent, thereby diminishing its 1990 gain to 9 percent.
Now take a look at the performance of the actual stock of the Italy Fund, bought by investors on the NYSE. Per-share price is down 32 percent for the year.
Herzfeld snapped up shares of the Austria Fund, taking advantage of a 17 percent price discount to portfolio value; Emerging Germany Fund, 23 percent discount; First Australia Fund, 24 percent discount; First Philippine Fund, 29 percent discount; France Growth Fund, 33 percent discount; Growth Fund of Spain, 21 percent discount; Irish Investment Fund, 28 percent discount; the Mexico Fund, 18 percent discount; the New Germany Fund, 18 percent discount; the Portugal Fund, 28 percent discount; and the Turkish Investment Fund, 21 percent discount.
Several years ago, top-performing funds were those of Japan and South Korea. The trend moved toward Southeast Asian countries such as Thailand and Taiwan. It then shifted to Western Europe and, more recently, Eastern Europe.
"The Middle East will have an impact on these shares, with TC peaceful outcome the best," Herzfeld concluded. "But whatever happens, I believe single-country funds offer the best profit opportunity I've seen in years."