U.S. investors seeking piece of Europe's action


July 04, 1993|By JANE BRYANT QUINN | JANE BRYANT QUINN,1993, Washington Post Writers Group

New York -- Investors hoping for a hit are buying tickets to the game expected in Europe. There's daily a risk that an escalating Bosnian war might throw Europe's markets for a loop -- but in that situation, says Larry Jeddeloh, an analyst with the Institutional Strategist in Minneapolis, he'd buy. Across the continent, countries have been adopting policies to pull themselves out of recession and create jobs.

Some countries -- England, Italy, Spain and others -- have had currency devaluations, leading to lower interest rates and a competitive edge for exports. Interest rates in Germany are also starting to cave in. As the German rate decline accelerates, production should pick up across the heart of Europe.

Lower rates also mean higher prices for investors. Typically, bond prices move up first, stock prices second. Stocks are up 7.5 percent since January, as measured by Morgan Stanley Capital International's Europe index.

Ten years ago, American investors would not have cared. But today, it's virtually standard advice that investors diversify at least 10 percent to 15 percent of their money into investments abroad. Although the U.S. market outperformed those of Europe over the past three years, the next three years may be different. Forecasters for the International Bank Credit Analyst in Montreal believe European equities offer the most potential, U.S. equities the least.

The managers of many international mutual funds agree. Jean-Marie Eveillard, president of the SoGen International Fund, says, "This is the first time in quite a few years that we're beginning to own more in foreign equities than we do in American equities."

His proportional commitment to European stocks, he says, is at record levels.

Bond-fund investors interested in Europe should check each fund's portfolio, to see how much is invested there. The past year's top performance came from global high-yield funds that invest largely in newly developing countries. Some of the funds that tilt to Europe, however, also produced total returns of 15 percent to 20 percent over the past 12 months. Among the leaders are two no-loads (no sales charge), Scudder International Bond and Benham European Government Bond, and two load funds, Putnam Global Government Income and Govett Global Government Income.

Most analysts expect no big gains over the next 12 months. Simon Osborne, manager of the Govett fund, thinks "we may be at the last phase of the rally in the bond market in Europe," although he believes that bonds will to continue to offer "reasonable value."

Bond-fund managers must also think more carefully than stock-fund managers about the future of the dollar and protect themselves accordingly. When the dollar rises against European currencies, it reduces returns from European investments. Bond funds (especially short-term bond funds) are more vulnerable than stock funds, because stock funds have higher long-term returns.

Market-timers like Richard Davidson, European equity strategist for Morgan Stanley, still advocate bonds for now and stocks for later. If you're not a fund-hopper, however, and expect to stay invested for at least two to three years, "I would prefer a stock fund," says Ken Gregory, editor of the newsletter No Load Fund Analyst.

Some recent high-performing international mutual funds with at least 40 percent of assets in Europe, according to Morningstar in Chicago, are: the no-load Pfamco International Equity in Newport Beach, Calif.; the no-load Managers International Equity in Norwalk, Conn.; the low-load Sierra International Growth in Los Angeles; and the load fund GAM International.

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