Going for the Globe
If you want to plunk some cash into a fund that invests its assets outside the United States, look for an international fund. Sounds obvious, but unlike global funds, which may invest their assets anywhere on the planet, international funds have portfolios filled with only non-U.S. companies.
This past year was a great one for international funds; the average fund was up more than 40 percent-double the performance of the average S&P 500 index fund. But that's nothing compared to the average small-cap international fund-it had a total return of more than 75 percent. Even through the first quarter of 2000, the average small-cap international fund was up more than 13 percent. Since then, however, the story has been darker.
Federated International Small Company Fund, up more than 126 percent in 1999 and 8.7 percent at the end of June, is a small-cap fund that takes small caps seriously. With more than $1.5 billion in assets, this small fund has big money, which is why it holds roughly 294 companies in its portfolio. "You can't invest too much money behind these names because liquidity and trading volume are paramount," says Leonardo A. Vila, the fund's portfolio manager. "In a bear market, you want to be able to sell quickly."
When shopping for companies, Vila looks for the following: companies with 20 percent annual earnings growth rates; ones that hold the No. 1 or No. 2 positions in their niche products or services; excellent management; and companies that are "local consumption plays," meaning they derive most of their earnings or sales from the local economy. Take Kamps, a German bakery, for example. According to Vila, Germans are big bread eaters, consuming about 93 pounds of it per capita annually (compared with 48 pounds for Americans). He says, "What's great in a company like this is it doesn't matter what the Japanese yen is doing. Local consumption plays are fairly insulated from world trade."
Last year, a lot of the fund's gains came from its investments in Japan. This year, Vila thinks the best opportunities for growth in an aggressive stock-pickers' fund like this one are in Europe. As of late June, about 51.2 percent of the fund's assets were invested in Europe, 29.1 percent in Asia, 7.6 percent in Canada, 2.2 percent in the Middle East and Africa,.01 percent in Latin America, and the rest basically in cash.
A big consideration for wanna-be investors in this or any other small-cap international fund is volatility. Small-cap stocks, no matter where they're located, are risky but can offer the biggest bang for your buck. Add the discrepancies within various markets around the world to the equation, and it's easy to see why the pros suggest investors keep no more than 15 to 25 percent of their entire portfolio in international funds. With that in mind, understand that as the world gets smaller, more investment opportunities are likely to be found outside the mighty USA.
At a Glance
Fund Name: Federated International Small Company Fund (ISCAX)
Managed By: Federated Investors Inc.
Portfolio Manager: Leonardo A. Vila
Total Assets: $125 billion
Top Holdings: Kudelski SA (Switzerland), Swisslog Holding AG (Switzerland), Matalan (United Kingdom), Vestas Wind Systems (Denmark) and Zapf Creation AG (Germany).
Average Annual Return: 34.33% since its inception in 1996
Maximum Load: 5.5% on Class A, with Class B and Class C shares available
Total Expense Ratio: 2.03% including 12b-1 fee of .25%
Minumum Initial Investment: $1,500
Management Fee: 1.25%
Phone: (800) 341-7400
Figures are as of June 30, 2000
Dian Vujovich is a nationally syndicated mutual fund columnist and author of 101 Mutual Fund FAQs (Chandler House Press). For free educational mutual fund information, visit her Web site, www.diansfundfreebies.com.