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INTERNATIONAL BALANCED FUNDS: HOLDING UP IN THE MELTDOWNWith global markets reeling from the disasters in emerging economies, you might expect mutual funds that are broadly diversified across international stocks and bonds to be among the hardest hit. Far from it. In fact, "international hybrid" was the third-best-performing category of equity fund tracked by Morningstar Inc. from July 1 through Sept. 30. Somewhat of a catch-all category, the international hybrid group is made up mainly of international balanced funds, which invest about 60% of assets in stocks and 40% in bonds. The group also includes some eclectic funds with quirky strategies that also invest in a mix of international stocks and bonds. Beaten only by sector funds investing in precious metals (up 3.8%) and utilities (down 1.5%), international hybrid funds were down 5.2% last quarter, according to Morningstar's preliminary results. By contrast, international stock funds as a whole lost an average of 15.3% in the past three months, and domestic equity funds declined an average of 13.4%. International hybrid funds even performed better than domestic hybrid funds, which were down 6.4%. "International balanced funds stayed clear of emerging markets," says John Rekenthaler, Morningstar's director of research. The performance of stocks and bonds in developed markets in Europe was pretty similar to what happened in the U.S., he says. MORE OPTIONS. The international hybrid fund managers may have benefited from having a wider choice than their counterparts in domestic hybrid funds have when it comes to deciding where to put their assets. These funds can invest in U.S. securities, even though most specify that a majority of assets much be invested overseas. They had an average of 19% of assets in U.S. stocks last quarter, while domestic hybrids were 50% in U.S. stocks. The ability to move some assets back into Asia, where much of the pain occurred in the first half of the year, may have helped some diversified international funds in the third quarter. Funds that invest in the Pacific Rim (excluding Japan), lost an average of 6.7% in the third quarter, quite a bit better than the nearly 15% decline of the average U.S. stock fund. International hybrids also benefited from keeping a greater percentage of their assets safe in cash -- about 16% -- while domestic hybrid funds only had 8% of assets in cash. It's mainly thanks to their bond stakes that international balanced funds held up as well as they did, however. The recent strengthening of the German mark and other European currencies (excluding the British pound) against the U.S. dollar generated currency-exchange gains on top of gains in the high-quality foreign bond prices. ONE WINNER. Within the international balanced group, one fund stands out from the rest. Smith Barney International Balanced gained 3.6% in the past three months and is the only international fund invested mainly in stocks to eke out a positive return in this time frame. Vanguard Horizon Global Asset Allocation Portfolio, which fell 2.9% in the past three months, and MFS Global Total Return Fund, down 3.4%, also performed well among funds that pursue roughly the same broad strategy. Morningstar's Rekenthaler says international balanced funds are best for investors looking for one-stop shopping. "If you can only own one fund, it makes a lot of sense," he says. "I think over time you'll see more of these." International balanced funds haven't caught on with the public yet, he says, mainly because investors have been so focused on domestic stocks. While international hybrid funds may have shined in the past quarter, over the past three years they have returned a paltry average of 6% a year, vs. 13.3% for diversified U.S. equity funds. Smith Barney International Balanced, which has averaged 5.52% returns for the past three years, has only $16 million in assets currently. The 90s have clearly been the decade of U.S. stocks. But if the globalization of financial markets starts to deliver benefits to investors (instead of the recent havoc), these funds should sooner or later outperform pure U.S. funds, Rekenthaler suspects. In any case, he adds: "It's nice to see them kind of come through in the downturn."
By Amey Stone in New York RELATED ITEMS
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Updated Oct. 5, 1998 by bwwebmaster
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