Funds offer a world of opportunity

MUTUAL FUNDS

June 28, 1992|By WERNER RENBERG

Ask a broker where you can get yields exceeding those of money market funds or certificates of deposit without exposing you to high credit or interest rate risk, and there's a chance that he'd recommend a short-term world (or multimarket) income fund.

To take advantage of the higher yields available abroad, most of those funds invest in foreign money-market instruments and investment-grade issues maturing in three years or less. They also might invest in short-term U.S. debt securities.

But would one of these funds be suitable for you?

"These are not no-risk funds," Gordon K. Johns, portfolio manager of Kemper Short-Term Global Income Fund, said of his and his competitors' funds. "They're low-risk funds."

Most managers might try to maintain stable net asset values (NAVs) while generating relatively high current income, but there's no guarantee that they'll always succeed. The funds' NAVs do fluctuate.

If they're primarily invested in government and high-quality corporate securities to minimize credit risk and in short maturities to minimize interest-rate risk (the risk that an increase in rates will cause bond prices to fall), what other risk do they involve?

There is currency exchange rate risk -- the risk that foreign currencies would weaken against the U.S. dollar, reducing the dollar value of the funds' non-dollar holdings and interest income.

To reduce the risk, the funds' managers might engage in a variety of hedging strategies, such as options, futures contracts and forward currency contracts. "Cross-hedging," developed by Robert M. Sinche, portfolio manager of Alliance Short-Term Multi-Market Trust and subsequently applied by newer funds, involves using contracts to buy one currency and sell another.

Such hedging strategies are not guaranteed to work perfectly. Something unexpected can happen, causing the funds' NAVs to fall. Moreover, they also involve costs, which eat into returns.

Assuming that you can accept the risk of a slightly volatile fund, what should you know to choose one?

As classified by Lipper Analytical Services, there are 29 short-term world multimarket income funds, most of which impose loads that reduce your returns. Two -- the $6.3 billion Alliance Fund and the $5.9 billion Merrill Lynch Short-Term Global Income Fund -- account for more than half of the group's $22.5 billion in assets.

Nine offer two classes of shares: A shares that bear front-end loads and B shares that bear deferred sales charges. B shares also involve higher annual expenses because of higher 12b-1 distribution fees, that result in lower yields.

All but five are less than two years old. In the latest 12 months, their total returns ranged as low as 3.1 percent, and principal-only performance was negative for most. But 12 months constitute too short a period for meaningful analysis.

Inasmuch as their performance records don't give you much to go on, it's even more important to understand their investment policies -- they're not all alike -- and the factors behind the leaders' results.

Unlike most funds in the group, whose managers seek to keep NAVs stable, the Huntington Global Currency, Hard Currency and High Income Currency Portfolios tend to be volatile -- but can earn higher returns.

Invested in money-market instruments whose weighted average maturity is 120 days or less, they are actively managed to deal with currency risk and use hedges less, says President Donald P. Gould.

Among the rest, some must invest at least 25 percent or 35 percent of assets in U.S. dollar securities. Others have no such minimums.

The Kemper fund invests only in European securities. Almost half of its assets are in Italian lira and Spanish pesetas.

Permitted to go out to three years, Johns stays with maturities of less than one year -- currently, it averages seven months -- to minimize interest rate risk.

To Tom Slefinger, manager of Van Kampen Merritt Short-Term Global Income Fund, avoiding problems has been as important as making good calls. He avoided Finland's devaluation of the markka and the depreciation of the Canadian dollar, which hurt other funds.

Margaret Craddock, manager of Scudder Short Term Global Income Fund, the only no-load fund among the year's leaders, attributes her fund's performance in part to large positions in European currencies, led by the German mark and the British pound.

The fund is about 30 percent in U.S. dollar securities, but they're hardly all low-yielding. A number of them are higher-yielding securities issued by foreign companies and governments but denominated in dollars. "I'm getting everything out of our U.S. position that I can wring out of it," she says.

Jeff Brummette, portfolio manager of Prudential Short-Term Global Income Fund, says his recent performance was helped by extending maturities and by relying more on traditional hedges than on cross- hedges because he suspected the latter might not work as well.

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