Overseas funds had best gains in first quarter

Performance was far better on average than that of U.S. cousins

Hot Russian, Japanese equities

New markets open up, especially for cell phones

Your Money

April 18, 2004|By Andrew Leckey

With the psyche of American investors scarred by international trauma, it may come as a surprise that some of the best opportunities to make money in mutual funds this year have been abroad.

Russia, for example, doesn't seem as risky as it once was. It's loaded with profitable nickel, natural gas and oil, and its citizens are becoming hooked on cell phones. As 10 Eastern European nations prepare to enter the European Union next month, the entire region is gaining economic clout.

Japan, once left for the economic scrap heap, is gradually getting its act together. Its homebuilders, banks and retailers are reaping the rewards of a system becoming more accommodating to the free market.

While the average U.S. fund managed a 2.98 percent gain in the first quarter, world funds averaged 5.13 percent, with Japanese equities rising 13.82 percent, according to Lipper Analytical Services.

"What's bad for the American consumer is good for Russian oil stocks," said Julian Mayo, London-based director of investments for U.S. Global Investors Eastern Europe Fund, up 25.32 percent in the quarter by emphasizing Russia, Poland and the Czech Republic. "There's also great potential in Eastern Europe for catching up in mobile-phone penetration rates and expansion of bank deposits."

For example, stock in wireless firm Vimpel Communications (available here as an American depositary receipt under symbol VIP), whose Bee Line brand offers cell phone and Internet service coverage to 92 percent of Russia's 134 million people, has been a strong performer.

Another hot company is Russia's Norilsk Nickel, the world's largest nickel producer, benefiting from rising commodities prices. Savings bank Sberbank, helped by a belief the country is "under banked," is another solid performer. Neither has an ADR.

Japan is a tiger attempting to change its stripes. Consumer confidence is up, though most Japanese citizens prefer the safety of saving at the bank over the financial markets.

"Japan leading everything international in the first quarter hasn't happened in a long time," said Don Cassidy, senior research analyst with Lipper Analytical in Denver. "Over 10 years, Japanese funds are still down 0.7 percent per year, and over 15 years they're up 0.4 percent."

If the Japanese begin to invest more in stocks, their economy and markets would boom. There are initial signs of that.

"Small- and mid-cap stocks of Japanese retailers, builders and real estate companies were attractively priced at levels I hadn't seen in years, so I began to buy them a year ago," said Curtis Freeze, a Honolulu portfolio manager for Japan Smaller Companies Fund, up 21.36 percent in the quarter. "Even though our fund and the Japanese market have now gotten a lot of attention, there are many good buys and good values left."

Stocks of Tokyo homebuilder Touei Housing, condominium developer Joint Corp., furniture retailer Nitori and baby goods retailer Nishimatsuya Chain have been hot performers for the fund. None is available on U.S. exchanges.

Investing overseas, especially in markets that are emerging or have recently struggled, is never a walk in the park. There are political, economic and currency risks, and, due to their volatility, such investments should constitute no more than 10 percent to 15 percent of your total investments.

In U.S. stock funds, small caps continued to beat large caps in the first quarter, though the top performer was a small fund emphasizing blue-chip stock names.

"Our flexibility, stock selection and ability to switch sectors made a difference in the quarter, and we also had over 50 percent of portfolio in cash in March," said Heiko Thieme, portfolio manager for the often volatile American Heritage Fund, up 44.44 percent in the quarter. "For 2004, I expect a new Dow high of 12,000, Nasdaq at 2,500 or more and Standard & Poor's 500 at 1,375."

Technology stocks Hewlett-Packard Co. (HPQ), Nortel Networks Corp. (NT), EMC Corp. (EMC) and Lucent Technologies Inc. (LU), along with drug stocks Pfizer Inc. (PFE), Schering-Plough Corp. (SGP) and Merck & Co. (MRK), are major holdings.

Andrew Leckey is a Tribune Media Services columnist.

Top performers

The top stock mutual fund list for the first quarter of 2004 is peppered with funds that invest in Eastern European, Russian and Japanese stocks, as well as technology, according to Lipper Analytical Services:

American Heritage Fund (AHERX)

* Status: +44.44%

* Based: New York

* Assests: $1 million

* Load: None (no sales charge)

* Minimum initial investment: $2,500

* Phone: 212-397-3900

Third Millennium Russia (TMRFX)

* Status: +31.57%

* Based: Richmond, Va.

* Assests: $25 million

* Load: 5.75 percent

* Minimum initial investment: $1,000

* Phone: 800-527-9525

ProFunds Ultra Wireless (WCPIX)

* Status: +27.70%

* Based: Bethesda

* Assets: $41 million

* Load: None

* Minimum initial investment: $5,000

* Phone: 888-776-3637

ING Russia "A" (LETRX)

* Status: +27.26%

* Based: Scottsdale, Ariz.

* Assets: $245 million

* Load: 5.75 percent

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