Price advice to clients: Go global for returns

December 02, 1993|By Ian Johnson | Ian Johnson,New York Bureau

NEW YORK -- Expecting U.S. markets and the economy to provide investors with another ho-hum year of steady growth and average returns, T. Rowe Price Associates Inc. is recommending that its clients put money in more volatile overseas and junk bond funds.

Although U.S. stocks are still attractive, overseas markets are likely to give a repeat performance of this year's 36 percent growth, said M. David Testa, who heads overseas operations for Baltimore-based T. Rowe Price. By comparison, the S&P 500 index of leading U.S. companies increased just 9.9 percent between Jan. 1 and Oct. 31.

"We'd tend to underplay the United States in our portfolio weighting," Mr. Testa said. "Not that there's anything wrong with U.S. markets, but there are better opportunities overseas."

The advice is important to thousands of investors. The Baltimore-based mutual fund company has developed into one of the country's largest no-load mutual companies.

Money under its management has increased 25 percent over the past year, to $50 billion, from $40 billion, chief executive George Collins said.

Speaking at T. Rowe Price's annual outlook for the coming year )) in New York, Price officials painted a picture of a steady economy and good investment opportunities. The prognosis for the economy next year includes moderate but steady growth of 3 percent, compared with about 2.5 percent for this year, said T. Rowe Price financial economist Paul Boltz.

Inflation should also remain steady, Mr. Boltz said, though at some point next year the Federal Reserve is bound to raise interest rates. Rates are so low now relative to inflation that the Fed risks reigniting a serious bout of 1970s-style inflation if it does not act, he said. Higher rates could trigger a stock market fall, though T. Rowe Price analysts did not say they are predicting one.

For now, the environment of steady growth and low interest xTC rates is helping many of the distressed companies that issue high-interest rate -- or junk -- bonds, said Catherine Bray, who heads the T. Rowe Price High Yield Fund. Investors have been spared default -- the chief risk of junk bonds -- with the default rate at a record low of 1 percent for the first 10 months of this year, she said.

The risks of investing in junk bonds, however, include low liquidity in some of the bonds, which can make it hard for a mutual fund tosell when it wants. This is because a growing percentage of junk bonds are issued by small companies. One-third of the market is now made up of issuances under $200 million, compared with about one-fifth of the market in 1989.

Investors, however, have been willing to overlook these blemishes as they search for higher yields. Junk bond mutual funds averaged nearly a 10 percent return last year, compared with 3 percent for money market funds, according to Lipper Analytical Services.

In fact, even T. Rowe Price's own "Spectrum" funds -- broad, conservative umbrella funds that channel some investors' money more specialized T. Rowe Price mutual funds -- have large positions in the High Yield Fund.

One area that Mr. Testa advised avoiding was Japan. Instead, Mr.Testa said, he favored Southeast Asian countries, such as Singapore, Thailand and Malaysia, as well as Mexico and South America.

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