A look south of the border finds funds headed in right direction


July 28, 1991|By JANE BRYANT QUINN | JANE BRYANT QUINN,1991, Washington Post Writers Group

Washington -- If you were making foreign investments, which of the following markets would have made you more money over the past 15 years: stocks in Japan, Germany, Chile, South Korea or the United States?

Chile, says Boston-based Batterymarch Financial Management. From 1975 to 1990, Chile's market delivered a compound annual return of about 30 percent, compared with 26 percent for South Korea and 11 percent for the United States.

Before you start kicking yourself for not noticing, let me hasten to say that you couldn't have bought Chile's stocks 15 years ago, or even a Latin American mutual fund. Mutual funds have been slow to develop in that part of the world, chiefly because Latin countries didn't want the yanquis in.

The Mexico Fund broke out of the gate in 1981, but it took until 1988 and 1989 for the Brazil and Chile funds to follow.

Still, most Americans took no notice. Even Mexico's dazzling performance of the past seven years -- stocks up 1,034 percent in U.S. dollars, for an annual compound average return of 41.5 percent a year -- has passed virtually unmarked.

So this is your wake-up call. You can't shrug off Mexico any more, nor the handful of other energetic Latin countries that are recapitalizing themselves.

The region's notorious debt load is easing. In many countries, the endemic inflation has dropped from unspeakable to merely bad. The United States and Mexico are chewing over a free-trade pact. Brazil and Argentina have joined Mexico and Chile in selling some state monopolies to private investors.

Granted, Latin America has a lousy history for staying the course. One day there's a president, the next day a coup. One leader fights inflation, the next one prints money. Stock investors turn into princes, then paupers, then princes again, as the Brazil Fund so ferociously shows. Last year, the Brazil Fund dropped 63 percent. This year, it's up 127 percent.

Nevertheless, it's clearly time for investors to trust Mexico, which is "showing signs of becoming a steadier, serious place," says John Ford, foreign-markets analyst for the Baltimore-based mutual fund group T. Rowe Price.

The Mexico Fund's most recent record: up 69 percent in 1989, up 28 percent in 1990 and up 61 percent by mid-1991.

Chile, too, has gotten my attention. The Chile Fund rose 26 percent in its first year and 51 percent for 1991. To risk Brazil seems daft, in view of its struggling economy and yo-yo markets. Still, the respected chairman of Morgan Stanley Asset Management, Barton Biggs, has been touting Brazil to his clients as a prescient buy.

If you want to deal yourself a hand, your vehicle is a mutual fund. But none of the Latin American funds is of the type most familiar to investors. You cannot freely buy and sell shares at the fund's net asset value.

Instead, the funds are all "closed-end." Their sponsors sell shares in the fund only once, then invest the proceeds in a portfolio of securities. Once the offering is closed, no new money comes into the fund -- nor can you cash out at the fund's net asset value. Instead, its shares are traded through a stockbroker, just like the shares of any other corporation.

The price of the shares in a closed-end fund does not directly reflect the value of the securities it owns. Investors might pay more or less than the net asset value, depending on whether the fund is in demand.

In early July, for example, the Brazil Fund held securities worth $14.03 a share, but eager investors were paying $15.25 for them. That fund was said to be selling "at a premium." By contrast, the Mexico Fund, with securities worth $23.68 a share, was trading at only $20.25 -- in the parlance, it was "at a discount."

Closed-end investors hold two truths to be self-evident: (1) Never buy a fund when it's first offered to the public. You pay high sales and organizational costs that don't apply if you buy later. (2) Never buy a fund at a premium price; it will almost always drop to a discount. If you're holding a fund that has gone to a premium, think about selling.

If you don't want to place all your bets on a single country, consider the Latin America Investment Fund. It invests throughout the region (major country: Mexico) and is selling at a discount price. No market rises forever, but lately Mexico has been giving a pretty good imitation.

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