THE BEST OFFSHORE FUNDS (int'l edition) Amid the turmoil, our Scoreboard offers a wealth of data to guide you As Asia's currency crisis unsettles bourses around the globe, more than a few money managers are biting their nails. ''Confusion reigns out there,'' frets John C. Dreyer, London-based manager of the G-British Equity Fund. Yet Dreyer and many other managers running big offshore equity funds are not panicking yet. To be sure, many are selling some of their blue-chip stocks that racked up huge gains in 1997. But despite the most violent market turmoil in a decade, they argue that investors should not abandon hope. ''We take this in stride--just like we did in the 1987 stock market crisis,'' says the Templeton funds' emerging-markets guru, J. Mark Mobius, who has been picking up distressed banking and cement stocks in Thailand lately for his stable of U.S. and offshore funds. For an investor like Mobius, who's willing to wait up to five years for results, ''this provides good opportunities to buy bargains,'' he says. Should you follow Mobius' example and use the global shakeout as an opportunity to bargain-hunt? That, of course, depends on your tolerance for risk. Still, most money mavens think that for anyone seeking growth and willing to stomach short-term volatility, equities still are the best way for you to create long-term value. And for building diversification into your portfolio, nothing beats funds. But whether you're thinking of investing in the middle of the maelstrom or waiting a while longer until the outlook becomes clearer, the place to start your hunt is BUSINESS WEEK's annual survey of the world's 500 largest offshore equity funds. Our survey includes funds' results for the 12 months ended Sept. 30, before global markets plunged. With assets of nearly $90 billion, offshore funds are similar to their bigger American cousins, mutual funds. In fact, many of them are managed by big U.S. names--including Fidelity Investments, Citibank, and Goldman Sachs--as well as such major global houses as HSBC, Deutsche Bank, and Jardine Fleming. Catering to a far-flung investor base, offshore funds are largely domiciled in Luxembourg, the Cayman and Channel Islands, Bermuda, Hong Kong, and other centers that feature low to nonexistent income and capital-gains levies. Offshore funds aren't sold in the U.S. because they are not registered with the Securities & Exchange Commission. Because there's no single agency responsible for supervising and collecting data on offshore funds, as the SEC does for funds sold in the U.S., investors overseas have long had a difficult time keeping track of everything from performance to fees, management expenses, and portfolio holdings. As a result, they have had to rely on bankers, brokers, and financial planners to provide information on whatever funds they choose to sell. But you don't have to do that anymore. Working with Micropal Ltd., a London-based mutual-fund data organization that recently agreed to be acquired by The McGraw-Hill Companies (which also publishes this magazine), BUSINESS WEEK provides you with an exclusive Scoreboard that shows exactly how the world's 500 largest offshore equity funds measure up. HOW RISKY? The Scoreboard provides much more than basic data on fund returns. To help you choose wisely, we assign ratings to funds that have been on the market for at least five years, generally long enough to see how they perform in a variety of conditions. When we look at these funds, we measure their returns for the amount of risk their managers take with your money. The object is to show whether you would have been better off keeping your money in U.S. Treasury bills, the most widely accepted standard for riskless investing around the globe. We then gauge how well each fund performed relative to the Financial Times/Standard & Poor's Actuaries World Index. In the past year, only 23 out of the 500 funds merited our highest rating, three upward-pointing arrows (table, above). While a number of these are Hong Kong or China funds, reflecting a long-running bull market that appears to have come to a tumultuous halt after the end of our survey period on Sept. 30, quite a few European, Latin American, and U.S. funds also made the list. We also rank funds' total returns over the past year, in which Russian, Eastern European, U.S., and Chinese funds stood out--and Japanese, Korean, and Southeast Asian funds brought up the rear. We compare the one-year performance of each of the 500 funds with others that invest in the same geographic areas, and look at what all the funds earned over the past three and five years. We give you updates on the largest holdings and cash in fund portfolios. And for the first time, we show you whether a fund's manager is a veteran or just starting a new job. A change at the helm may prompt you to ask whether a fund with a stable long-term record may now be about to change direction. To help you avoid funds that gobble up your capital with high expenses, we provide what management companies charge you to buy and run your funds. Offshore fund fees and charges are generally higher than in the U.S., where the fund market is more mature and competition more intense. By using the data in the Scoreboard, you now can easily compare similar funds to see which may be a better buy. That's because over time, differences in funds' overhead can really add up. FEE FACTOR. Take, for example, CMI Global Network Fund U.S. Equity Index Tracker. An index fund with two upward arrows, it has returned around 20% annually for the five years through Sept. 30, yet charges a bare-bones yearly management fee of half a percent of your assets. In contrast, GT North America A, which also has earned two arrows and earned only a slightly better return, charges 2% annually. Our winner in the most-bang-for-your-buck category, however, is Putnam Emerging Information Sciences Trust, run by tech-stock guru Roland W. Gillis in Boston (page 89). The best performer among all funds that earned three up arrows this year, it has returned an average of nearly 38% annually since 1992. But it only charges a modest 1% management fee annually. To give you another strategic tool, we tapped the data base of our sister firm in London, Standard & Poor's Fund Research, to show you the handful of funds that have won high marks from both BUSINESS WEEK and Standard & Poor's Corp. (table, page 88). In contrast to BUSINESS WEEK, which evaluates funds on the basis of their performance numbers, S&P augments quantitative research with face-to-face interviews with managers, reviews of their holdings, and assessments of management firms' overall track records and attitudes toward taking risks. Funds that make it through the process end up with ratings of A, AA, or AAA. But even S&P's lowest-rated funds tend to be in the top 25% of their geographic sectors. Twenty-eight funds with BUSINESS WEEK three-arrow ratings have also won AAA status from S&P. ''These are run by really good managers,'' says S&P Fund Research Managing Director Peter A. Jeffreys. No matter which system you use to pick funds, this fall's market gyrations are probably the best reminder yet that it's a good idea to stick with ones that have turned in solid records over time. Of course, that's not a guarantee that a fund won't decline when markets are falling. But these funds' managers have proved themselves nimble in the past and thus may be able to withstand pressure better than their lower-rated competitors. Despite their current concerns about the global stock market's health, many of the highly rated fund managers interviewed by BUSINESS WEEK remain optimistic for the long haul. ''When we get market corrections like this, we find it's a good time to be opportunistic,'' says Fariba Talebi, whose Schroder International Selection U.S. Smaller Companies Fund returned 34.5% for the 12 months ended Sept. 30. A value investor who likes stocks with rapid earnings growth and low price-earnings ratios, Talebi is now prowling for issues that ''have gotten cheap for no good reason.'' While she declines to comment on what she may be buying now, Talebi's largest holding is Varco International, a maker of oil-drilling equipment that's currently benefiting from strong demand in the oil-services industry. Another fan of that industry is Donald Pitcher, manager of MFS Meridian U.S. Emerging Growth Fund, who has been selling high-tech stocks and buying such oil-services issues as Diamond Offshore Drilling and Cooper Cameron Corp. He also remains upbeat on the outlook for U.S. interest rates. Despite concerns about the Federal Reserve possibly raising rates in November, he thinks rates are more likely to move down. ''This would be a huge positive,'' he says. Major European markets, which have soared in recent months as the movement toward establishing a single currency has gained steam, are also attracting some price-conscious fund managers now that the euphoria is waning. Although he is unloading some of his high-flying British banking and insurance issues, G-British Equity's Dreyer, for example, is now going back into underperforming media groups, including EMI, Granada, and satellite broadcaster BSkyB. And despite misgivings that ''stock markets are quite expensive,'' RG Europe Fund's Rob van Bommel has increased his holdings of two Dutch blue chips: chemical maker Akzo Nobel and electronics manufacturer Philips Electronics. Philips came out high on RG's in-house model, in part because of a restructuring of its U.S. operations. Akzo won high marks for its strong showing in high-margin specialty chemicals. Russia is another market that has shuddered in the wake of the Asian blast. With many Russia funds more than tripling this year, the Moscow market seemed long overdue for a correction. As a result, such high-energy funds as Russian Prosperity Fund and Brunswick Russian Growth Fund, which turned in gains of more than 200% in the 12 months through Sept. 30, may find it hard to repeat such stellar performances for another year. Yet some stockpickers are not losing hope. Says Stephen Cohen, a managing director at Mercury Asset Management Group PLC: ''All we can do is ask ourselves if we still think there is value there, and have the political and economic risks changed? Our view is that things are still improving--although there are still risks.'' Mattias Westman, the Swedish-born co-founder of Russian Prosperity Fund, adds that a trade surplus and stable currency will continue to buoy the Russian economy and market even as investors flee shaky Asian bourses. He also notes his policy of diversifying into promising, lesser-known stocks is insulating Prosperity somewhat from the selling that has lately hammered blue chips. Westman argues that many Russian companies are establishing strong consumer-goods brand names. That should pay off in profits. Two of his favorites--Baltica Brewery and Samson, a meat processor, are already reclaiming market share from imports. Global market stresses have also hit Brazil hard even though the fundamentals appear sound: Bank of America is forecasting the economy will grow 3.3% this year and 4.3% in 1998. An estimated inflow of $15 billion in foreign direct investment, and the expected reelection of President Fernando Henrique Cardoso in 1998, are other positives. But investors have grown antsy--the Sao Paulo market plunged 24.5% between Oct. 21 and Oct. 28 before staging a partial recovery. ''I would be very cautious,'' warns Florian Bartunek, head of equity asset management at Rio de Janeiro-based Banco Pactual. ''The risks may be too high for some investors.'' Bartunek, whose Pactual Eternity Fund has recorded 37% average annual returns since 1992, maintains Sao Paulo's market could fall another 30% to 40% if Wall Street slides some more. Or, he adds, it could surge as much as 80% by the end of 1998 if the U.S. market settles down. Expectations of that kind of extreme volatility have prompted Bartunek to unload smaller, less liquid stocks in favor of such blue chips as Telebras, Eletrobras, and Petrobras, the national phone, electricity, and oil companies. One more area where you certainly won't find stability is the epicenter of the market mess--Asia. Since Thailand devalued the baht against the dollar in July, global investors have fled one East Asian market after another as country after country has been forced to follow suit. ''Sentiment is very negative at the moment,'' says Man Wing Chung, director of the HSBC GIF HK Equity Fund. ''We are not going to see overseas liquidity coming to this part of the world in the short and medium term.'' ''VOLCANO.'' The shift by Thailand, Singapore, Indonesia, Malaysia, and the Philippines to floating exchange rates has forced interest rates and inflation up, roiled economies, and injected a new element of uncertainty into investing in what long was the hot growth center of the world. With corporations no longer able to count on their governments to maintain stable foreign exchange rates, investors suddenly have had to factor in currency risk when trying to figure which way earnings will swing. Should Hong Kong's Monetary Authority lose its current battle to maintain a tie between its dollar and the greenback, a new wave of financial panic will doubtless sweep the former British colony--and, perhaps, the world. Even if the peg continues to hold, Templeton's Mobius still feels the Hong Kong stock market could face another 15% to 25% decline--bad news for a group of regional funds that have been one of the most prolific performers for years. ''We have been saying for a while that being in Hong Kong is like living on a volcano,'' adds RG's van Bommel. But Mobius and others counter that concerns over East Asia's economies are probably overdone. For one thing, observes Bank of America economist Eric Nickerson, devaluations will make the region more competitive, and eventually will be ''quite bullish'' for currencies, stocks, and bonds. Indeed, as they tread gingerly across the wreckage of East Asia's bourses, many Asia fund managers remain upbeat on China. It recently cut interest rates to spur an economy already expected to expand by more than 9% this year and next. That kind of growth may eventually put a floor under some China funds. But HSBC's Chung and others argue that more disappointments may await. Even after their 50% plunge since the end of August, for example, ''red chips''--Chinese-controlled companies that trade in Hong Kong--still appear overvalued. At their current level--around 30 times estimated 1998 earnings, red chips remain ''far too expensive,'' says Jardine Fleming unit trust investment director Patrick Wong. Hong Kong's blue-chip trading companies and banks are also vulnerable. ''We're finding better bargains elsewhere,'' says Mobius. After a fabulous bull market that took many markets around the globe to dizzying heights, a new sense of reality has pervaded the fund business. ''Stockpicking is certainly not as easy as it was,'' laments Colin Stone, manager of the Fidelity Funds Nordic Fund. Neither is picking the right fund during the wave of turmoil that has engulfed the markets. If you decide to wait until the storm has passed before you do anything, nobody will blame you. But when you do decide to invest, here is the wealth of data you'll need to help you make an informed choice. By William Glasgall, with Kerry Capell in New York, Heidi Dawley in London, Carol Matlack in Moscow, Ian Katz in Sao Paulo, and Bruce Einhorn in Hong Kong RELATED ITEMS TABLE: The Top Performers TABLE: The Largest Funds TABLE: The Best of 1997...And the Worst TABLE: Funds That Rate an `A' for Excellence WINNING BIG BY THINKING SMALL (int'l edition) TABLE: Gillis' U.S. Tech Favorites SCOREBOARD: The Best Offshore Funds (.pdf)

Updated Oct. 30, 1997 by bwwebmaster
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