A few years ago, international money managers invested in a variety of markets, from Asia to South America to Russia. Now, the collapse of many emerging markets around the world has made Europe the investment promised land for at least one international fund manager.
Since Thomas Mengel began managing the United International Growth Fund two years ago, he's decreased the number of stocks held in the fund's portfolio from more than 100 to about 80. He's also improved the fund's performance and has kept it above water when other international funds were drowning as a result of last summer's market crash. For example, early into the market's correction in mid-August, the total return for the United International Growth Fund was a handsome 25 percent, ranking it number four out of 465 international funds, according to Lipper Analytical Services. By mid-October, when the average international fund's performance was down about 1.2 percent, Mengel's fund was up nearly 8.5 percent.
The secret to Mengel's success? The markets he invests in. "I've been pretty much out of Asia for more than a year," says Mengel. Concerned about market conditions in Thailand, the increase in property prices in Hong Kong and what he saw in Asia during visits to the region in 1997, Mengel began selling off Asia fund holdings. As a result, the United International Growth Fund had very little exposure to those markets by the time the Asian financial crisis hit.
What drew Mengel to Europe was a belief in the European Union's improving fiscal and corporate policies. "The basic long-term outlook is still quite good. Inflation is low, interest rates have been really low and are going down even further, and Europe is becoming more competitive," he says.
The fund's portfolio includes a range of mid- to large-cap companies covering asset-accumulating sectors, such as finance and insurance, as well as the telecommunications, software, hotel and automotive industries.
While United International has a strong track record even in turbulent markets, prospective investors should be advised that international investing comes with unique risks and ought to remember the following:
- International funds aren't the same as global funds. International funds must invest most of their assets outside the United States. Global funds can invest anywhere they choose.
- The index to use as a benchmark for this or any other international fund is not the S&P 500 but the EAFE (Europe, Australasia and Far East) Index.
- When deciding how much to invest outside the United States, experts usually advise anywhere from 5 to 25 percent, depending on your comfort level and risk tolerance.
- Although many experts believe European markets look good for the next three to five years, it's clear that if U.S. stock markets fall, that downturn would impact European markets as well.
Dian Vujovich is a nationally syndicated mutual fund columnist and author of Straight Talk About Mutual Funds (McGraw-Hill), Straight Talk About Investing for Your Retirement (McGraw-Hill), and 10-Minute Guide to Stocks (Macmillan).