BUSINESSWEEK ONLINE : SEPTEMBER 11, 2000 ISSUE
BUSINESSWEEK INVESTOR So Who Needs Foreign Investing? U.S. multinationals offer global oomph Looking to add an little international flavor to your portfolio? You may already have a good deal of exposure to the global economy. Before you wander off into foreign terrain, you might take a closer look at the domestic stocks and stock mutual funds you already own. Many large U.S. companies count two-thirds or more of their revenues from outside the U.S., particularly if they're in the consumer cyclicals, energy, or technology sectors. Just think of McDonald's (MCD), Gillette (G), Texaco (TX), and Texas Instruments (TXN), all companies that generate more than half of their revenue outside the U.S. (table). And many diversified U.S. equity funds are chock-full of these American multinationals as well. Buying shares of U.S. multinationals can be an effective way for investors to gain exposure to the global economy--without the currency and political risks that go with owning non-U.S. shares. Besides, with global markets moving more and more in sync, owning stocks abroad doesn't help hedge against a U.S. market decline as much as it once did. Odds are if the U.S. market is taking a dive, so are most foreign markets. The case for buying U.S. multinationals boils down to this: American companies are safer, they aren't likely to be bested by foreign rivals, and their shares trade in the world's largest, most liquid markets. A lot of foreign markets are illiquid and highly vulnerable, both to policy missteps and to local manipulation. Mutual-fund managers who invest abroad, however, argue that focusing on U.S. stocks means missing out on such foreign companies as BMW, Sony (SNE), Nestle (NSRGY), or Nokia (NOK). ''If you choose to buy those products in your daily life,'' says David Antonelli, international research director for MFS Investment Management in Boston, ''why would you limit your ability to invest in those companies?'' Moreover, when investors limit themselves to domestic markets, they ''severely constrain their investment potential,'' says Willard Vincent, portfolio manager of the Duncan-Hurst International Growth Fund. He scored big gains for his shareholders with Scandinavian wireless communications companies and is now looking to make it big with Canada's Nortel Networks (NT), France's Alcatel (ALA), and Japan's Furukawa Electric (FUWAY). But some risk-averse stockpickers just loathe international equities. ''We think foreign stocks are an inferior investment and are more dangerous,'' says Roy Papp, manager of the $220 million Papp America-Abroad Fund, a large-cap growth fund. The fund's largest holdings are red, white, and blue all the way: Intel (INTC), State Street (STT), Interpublic (IPG), Merck (MRK), Microsoft (MSFT), and American International Group (AIG). Papp looks for domestic companies that earn at least 35% of their revenues abroad, and he invests in market leaders that he's confident will beat out foreign rivals. ''Who's going to win, McDonald's or the local outfit?'' he says. Adds Tom Lamming of the $53 million Buffalo USA Global Fund: ''We are investing overseas, but we're doing it by investing in companies that happen to be located in California.'' For now, the strategy doesn't have many imitators. Only three of the 7,400 funds tracked by Lipper focus on multinationals. Besides Papp's and Lamming's funds, there's just Fidelity Export & Multinational Fund. Later this year, Barclays Global Investors will launch an exchange-traded fund, called the iShares Global 100, that will trade on the New York Stock Exchange (page 166E4) and invest in the 100 largest multinationals worldwide. But hundreds of other funds, mostly large-cap growth or large-cap blend funds, happen to have huge stakes in these multinationals anyway. Morningstar counts 185 U.S. funds that have at least 70% of their assets in domestic companies with measurable non-U.S. revenues. That includes dozens of funds tied to the Standard & Poor's 500-stock index. About 80% of the S&P companies have revenues from abroad. Many portfolio managers of global funds, which can invest anywhere, often opt for homegrown stocks as well. Consider the Nicholas-Applegate Global Technology Fund, which can pick 100 of the best tech stocks worldwide. Last year, the fund racked up a 493.7% gain--but not from discovering exotic plays in faraway lands. Its big 1999 winners included Qualcomm (QCOM), a San Diego maker of digital wireless telecom gear; online bookseller Amazon.com (AMZN); and Internet incubator CMGI (CMGI). North American companies account for 69.4% of the fund's portfolio--and so far this year it's up an additional 13.8% (through Aug. 25). Another reason many investors are using U.S. stocks to invest abroad is that foreign stocks and mutual funds that invest in them have done poorly in recent years. In the past decade, international funds have lagged U.S. stock funds in all but two years--1993 and 1999. Last year was exceptional because foreign markets rebounded from the global financial system's near-meltdown in the second half of 1998. Besides currency and market risks, investing in international stocks and mutual funds isn't cheap, either. True, many large foreign companies trade in the U.S. in the form of American depositary receipts, which brings the cost down to that of buying U.S. stocks. But buying foreign shares in their home markets can be expensive: Commissions are often higher, and you can get hit with assorted local taxes and charges as well. HARD TO SEE. The higher costs that go with investing outside the U.S. also show up in the mutual funds. According to Morningstar, annual expenses for the average foreign-stock fund are 1.89% of assets, vs. 1.34% for diversified U.S.-equity funds. Foreign funds often cost more because global investing requires a lot of research--not just covering a greater number of companies, but also digging through less-than-transparent financial statements, says Morningstar analyst Greg Wolper. Another problem with some international funds is that they don't necessarily stick to larger companies in the developed economies. The average foreign-stock fund currently holds about 9% of its assets in riskier emerging-market stocks, Morningstar reports. This cuts both ways, of course. In 1999, emerging-markets investments helped such funds as Janus Overseas and Oakmark International Small Cap Fund immensely. This year, emerging markets are underperforming the developed markets, and dragging the funds down. Volatility in the foreign exchange market can make international investing scary. Pick the right stock but the wrong currency and your investment can still go down the drain. True, some mutual funds do hedge currencies, but that is costly and not always effective. U.S. multinationals are not immune to currency swings, but their shareholders usually are. Most U.S. companies operating abroad employ sophisticated financial hedging systems that manage currency risk on a global scale. International stocks can produce outsized returns, and most investors should place some portion of their portfolio in non-U.S. stocks. But if you're a little nervous about venturing too far from home, you can invest comfortably in the ever-expanding global economy--by sticking with the U.S. names you know. BY MARA DER HOVANESIAN _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS The New Global Investor CHART: Global Markets Are Growing Fast...Shrinking the U.S.'s Dominance...And Internet Use Abroad CHART: The Case for Global Sector Investing Conquering a Slice of the World TABLE: Spanning the Globe All Abroad for Exchange-Traded Funds TABLE: How ETFs Stack Up against Their Rivals A Talk with a Global Strategist TABLE: Sargen's Picks VIDEO: Investing in the Global Village So Who Needs Foreign Investing? TABLE: Global Action Around the World in 80 Clicks TABLE: Going Global with the Web INTERACT E-Mail to Business Week Online

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