European funds grow more volatile

Andrew Leckey

October 07, 1992|By Andrew Leckey | Andrew Leckey,Tribune Media Services

No one ever said international investing would be easy. But investors in mutual funds that emphasize overseas investing have lately received a tough lesson.

European stock funds are down 3 percent for the year, much of the decline coming in the past tumultuous month. Meanwhile, short-term multimarket funds are flat, and long-term international bond funds are up about 3 percent.

Many Americans had looked to European investments for a quick solution that could avoid the ills of the U.S. economy and its financial markets. After all, Europe was supposedly getting its economic act together.

Volatility of overseas currencies, economies and interest rates means international investments really shouldn't constitute any more than 10 percent of your total portfolio. Over time they'll prosper, but they're not a quick fix.

"European markets are certainly not something you bet the ranch on," observed Gus Sauter, in charge of Vanguard International Equity Index Fund Europe.

Performance of European funds during the currency turmoil has varied with goals and composition.

"Long-term bond funds that invest only in Europe were most affected by volatility, since they move more sharply than shorter-term funds or currency funds," explained Don Phillips, publisher of the Morningstar Mutual Funds publications. "The long-term funds that don't engage in hedging at all had even greater volatility, though even hedging hasn't proven to be a panacea."

Investors who put money in short-term multimarket funds because they considered them akin to money-market funds or bank certificates of deposit, should take their money out, Phillips advises. They're only suited for those who can handle volatility required for higher yields. Phillips recommends moving out of the under-performing short-term multimarket funds of either Pilgrim or Kemper Investments. He prefers Van Kampen Merritt's Short Term Global Income Fund because it's up 5.78 percent this year.

"Average maturity of our fixed-rate debt instruments is 1.5 years right now, and we avoided recent European currency volatility by diversifying into other economic regions," said Thomas Slefinger, portfolio manager of Van Kampen Merritt Short Term Global Income Fund. "We'll remain fully hedged using options and forwards strategies until European markets stabilize and we see a trend."

Meanwhile, Phillips' recommendations in European stock funds include Merrill Lynch Euro Fund and, in a closed-end fund, GT Greater Europe Fund.

"There are potential benefits for European equity funds, since a decline in European interest rates from the currency crisis should help stock performance," said Phillips.

Europe has been a problem in long-term bond funds. "Using an average maturity of 10 years, half of our bonds are from Europe and some of our European bonds have definitely done better than others," said Mark Turner, managing director of Scudder, Stevens & Clark Inc. "While bonds more closely linked to Germany, such as those of France, Holland and Belgium, have done reasonably well, those from weaker European bond markets haven't."

He believes an investor should have a five-year time horizon, keeping in mind that a portfolio with one-fourth of its holdings in international bonds historically would have been a real winner. Over time, bonds from overseas have outperformed those of the United States.

"We'd seen big gains in the stocks in our fund until the United Kingdom encountered trouble, then virtually all markets pulled back," said Mr. Sauter of Vanguard . "Now they've come back a bit, but there's no question that, across-the-board, the currency situation in Europe has spilled over to its stock markets."

Top-performing European stock funds in 1992, according to Morningstar, are:

* European Plus, Capstone Financial Services, Houston; $19 million in assets; 4.75 percent load (initial sales charge); up 2.83 percent.

* Fidelity Europe, Fidelity Investments, Boston; $443 million in assets; 3 percent load; up 1.33 percent.

* Alliance New Europe, Alliance Capital Management, New York; $103 million in assets; 5.5 percent load; up 1.17 percent.

* Vanguard International Equity Index European, Vanguard Group, Valley Forge, Pa.; $239 million in assets; no load; up 1.01 percent.

* Putnam Europe Growth, Putnam Co., Boston; $10 million in assets; 5.75 percent load; up 0.74 percent.

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