Discovery Fund enjoys its turnaround


LONDON -- The T. Rowe Price International Discovery Fund is finally getting a break.

The $310 million fund is ranked No. 2 out of 12 small-cap international funds tracked by Lipper Analytical Services.

It has returned 5 percent through Feb. 1 -- about two percentage points ahead of the average.

"The first few weeks of the year have been encouraging," said Mark Edwards, one of the fund's managers.

He's heartened because the fund has lagged behind its small-cap international competitors for the past 18 months.

Last year, the fund lost 4.4 percent, while the average small-cap international fund gained 5.8 percent.

Now it looks as if the very investments that dragged the fund down -- emerging market stocks and smaller small caps -- may be paying off.

"We think the fund will benefit from emerging markets exposure," as well as from investors willing to take money out of larger-cap companies, which were the stars of 1995, said Mr. Edwards.

Last year was one to avoid the emerging markets.

Investors lost confidence in developing economies around the world after the Mexican government abruptly devalued the peso.

This year, however, they've staged a turnaround.

In the first six weeks of the year, markets in Hungary, Poland, Turkey and Brazil top the list of best performers.

Mr. Edwards is a big believer in emerging markets.

"Some of the small-cap funds tend to restrict themselves to established markets," he said, "but in the longer term there are superior rates of growth in Southeast Asia and Latin America."

Last year, the fund had about 35 percent of its money in emerging markets, about twice the average for the six competing funds that T. Rowe Price tracks, said Steve Norwitz, a spokesman for T. Rowe Price in Baltimore.

"Our weightings haven't changed that much from last year," said Mr. Edwards.

"We gritted our teeth and tried to hang on because the danger is that you surrender right at the worst possible moment."

The fund had about 11 percent of its money in Latin America, where markets from Chile to Mexico fell as much as 30 percent in dollar terms last year.

The fund also owned smaller companies than did its competitors.

The median market cap of companies owned by the fund was $390 million, compared with an average of $616 million, Mr. Norwitz said.

Mr. Edwards is optimistic this year because U.S. investors are putting more money abroad and "interest rates in other parts of ** the world have room to go lower, particularly in continental Europe."

The only sticking point for small-cap companies is that they need economic growth to flourish.

Mr. Edwards reckons that 2 percent to 4 percent is enough to keep stocks buoyant.

"We think that is likely," he said.

His biggest bet is Southeast Asia, where the fund has 29 percent of its money.

Japan accounts for 16 percent, Latin America for 8 percent, the United Kingdom for 14 percent and the balance in continental Europe.

"We try to focus on companies that are growing steadily and at superior rates," Mr. Edwards said.

That means staying away from cyclical industries.

The fund owns about 500 companies, including Ashtead Group Plc, a British machinery rental company; Guilbert SA, a French stationery company; and Dixie Toga SA, a Brazilian packaging company.

Latin American markets such as Mexico and Brazil have done so well this year, climbing 11.6 percent and 22 percent respectively in dollar terms, that Mr. Edwards plans to trim back in these markets.

He's looking to pick up some stocks in Germany, the Netherlands, Belgium and Switzerland, where he's been underweight in the past six months because of a slowing German economy.

The German economy stopped growing in the middle of last year, and the government is forecasting growth of 1.5 percent in 1996.

"Our view is that the slowdown is now pretty well reflected in stock prices, so we are now selectively looking to add Germanic stocks," Mr. Edwards said.

Germany now makes up about 4 percent of the fund's portfolio, compared with 7 percent for the Morgan Stanley EAFE index.

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