Don't confine yourself to American stocks." It seemed like such good advice a few years ago. What happened? In the three years ending March 31, 1997, international funds, on average, had a total return of 24 percent, according to Lipper Analytical Services, a mutual fund research company in New York City. In the same period, however, the average domestic equity fund was up a little over twice as much, at 56 percent. For investors who had been enticed by stories of much more rapid growth in overseas markets, these years were a sore disappointment.
This was not a normal period, however, and after such an upset in investing, the scene often changes dramatically. Stocks in countries around the world are now much cheaper relative to domestic stocks. That is clearly a good sign for future performance.
Even in those three years, though, some funds managed to squeeze more out of foreign markets than did their competitors. USAA International was one of those funds: It had a return of 39 percent--50 percent better than an average fund of its type. What's more, the results seem to have been achieved by taking fewer risks than most funds. Morningstar sums up its findings: "This fund's moderate volatility, above-average long-term returns and below-average expenses are tough to beat."
USAA is headed by three managers--David Peebles, Albert Sebastian and W. Travis Selmier II--who together allocate assets among different groups of markets but make their stock picks individually. Relative to the capitalization in all international markets, USAA's portfolio has been underweight in Japan, overweight in emerging markets and about even in Europe.
The managers' approach to stock selection varies from the norm as well. They prefer undervalued stocks in some markets and strong growth in others, primarily emerging markets. "When you're working in 40 countries, all of which are in various stages of development, you can't rely on a single style," Peebles says.
The fund spreads its investments across the world in some 160 different holdings, the largest of which comprises about 1.5 percent of total assets. Since it was started in 1988, USAA has had just two negative years--a significant drop of 9.3 percent in 1990 but only a marginal decline of .15 percent in 1992.
The fund tries to find extra potential by taking advantage of the inefficiencies in world markets. For example, the fund's managers are very optimistic about Russia, which, they point out, for the first time in the 1990s should have positive growth this year. They are optimistic, too, about Egypt, where a large privatization program is putting banks and cement companies alike on the market. They also see great opportunities in Brazil's natural resources now that the country's hyperinflation rates have dropped dramatically.
In Europe they see companies starting to be more shareholder-friendly, such as through simplified share structures, cost-cutting and spinoff companies that are more focused on their own niches. Although unemployment is near all-time highs in some countries and economic growth has been sluggish, some leading companies are reporting double-digit earnings growth.
A range of widely held names, such as oil company Elf Aquitaine, Canadian National Railway, Honda Motors and Bank of Scotland, all find a place in USAA's portfolio, along with lesser-known companies that are probably unknown to the average investor. It is a portfolio that covers much of the world but does so in its own way.