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NEGLECTED FOREIGN FUNDS
Three of the best-kept secrets among foreign stock funds

With more than 3,000 investment funds available in Canada, it's likely that most are not worthy of your hard-earned money. Also, with a handful of larger firms dominating mutual fund advertising, many fund companies with small marketing budgets are susceptible to investor neglect. As the saying goes, "out of sight, out of mind". This week, I want to highlight a few foreign stock funds that you've probably never hear of, and hence, never consider for your portfolio. However, the funds profiled in this article deserve your attention, and perhaps some of your money.

MAWER WORLD INVESTMENT

This fund differs from the other funds profiled this week in that it's an international fund - meaning that it invests strictly outside of North America. It's managed by Gerald Cooper-Key and makes extensive use of American Depository Receipts (ADRs) to gain overseas exposure. (An ADR is a certificate issued by a US bank, which represents some multiple of the original foreign share. For instance, Nokia ADRs are traded on the New York Stock Exchange but are linked to Nokia's shares on the Finnish exchange. ADRs are issued mainly on larger companies since it involves additional costs, such as restating financial statements to conform to US standards.) While this approach gives the fund a large cap bias, it's arguably a less risky approach since the manager doesn't have to worry about substandard accounting practices in many overseas countries.

Two major geographic shifts occurred toward the end of last year. First, Cooper-Key's confidence in Europe was reinforced by increasing exposure to nearly 70 per cent and reducing Asia (including Japan) down to just 15 per cent. Given their already fragile state, Cooper-Key feels that Asian exporters are the most vulnerable to a continuation of the US slow-down and doesn't think the potential upside is worth the risk.

In true Mawer form, this fund is run with a style that blends the qualities of value and growth. Fees are relatively cheap with a MER of just 1.6 per cent - nearly a full percentage point ahead of its peers. Turnover averages about 60 per cent annually - below average for international funds. Finally, performance has been awesome, topping the Morgan Stanley EAFE index handily over the past ten years (13.5 per cent vs. 9.9 per cent for the ten years ended April 30, 2001). This is a terrific fund for portfolios heavy into US equities.

SAXON WORLD GROWTH

Bob Tattersall runs this global fund, which invests in stocks of all sizes everywhere outside of Canada. Tattersall runs this portfolio, like all others at Saxon, with a true value tilt. For the past couple of years, Tattersall has emphasized global small/mid caps but recently shifted exposure to larger companies in parts of the portfolio. The fund has a 20 per cent weighting in Japan. Though he still thinks Japan will eventually recover, he admits it will take longer than originally anticipated. So why does he keep so much in the battered country? Many mid-sized companies are trading at such huge discounts that they are trading for share prices equal only to their investment portfolios - with no value given to companies' core operations. That's a great opportunity that no value manager can ignore.

Tattersall holds just about 35 stocks in this portfolio. Expect that number to rise a bit since the fund currently has about 14 per cent in cash after selling off a couple of stocks that reached Tattersall's target price. Typically, a global fund holds 100 stocks (often much more). Unlike many of its peers, this fund doesn't just hold ADRs. In fact, most are not ADRs and really couldn't be given the fund's focus on smaller companies. The concentration of stocks may mean a bit more ups and downs, but it should also translate into higher returns over time. Tattersall is true to his value label, with relatively infrequent trading. Turnover has averaged just 20 per cent over the past couple of years. He's matched the returns of the Morgan Stanley World Index, but with less risk. Add to those fine characteristics a MER of 1.75 per cent and this fund provides all of the ingredients to a core global holding.

SCEPTRE GLOBAL EQUITY

This old fund received a makeover in 2000. In the fall of last year, US fund giant Putnam Investments Inc. purchased a 5 per cent interest in Sceptre Investment Counsel. Shortly following the strategic alliance, Putnam took over management of this ailing portfolio and promptly restructured the holdings to mirror Putnam's own US-based Global Equity Fund. The restructuring resulted in heavy trading and a turnover rate of 179 per cent. Putnam's own fund has an average turnover of about 150 per cent annually over the past five years. While you'll notice that this Sceptre fund has a fairly long track record, you can just toss that out the window and only pay attention to the numbers as of late 2000.

Previously, Sceptre's in-house global stock picker, Lennox McNeely, ran this fund. Under his direction, this fund (formerly called Sceptre International) was widely regarded as one of the global stock funds to own by fund analysts. McNeely picked countries and stocks using a value-based approach. However, he began underperforming when he missed out on Japan's big year in 1994. McNeely's slump continued and then was burned (along with many other managers) by the Asian currency crisis. Subsequently, he began re-evaluating his style and made some changes. He stopped trying to pick countries and re-focussed on stock picking. Unfortunately, the numbers never turned around and we'll never know if they would have.

Putnam's US-based Global Equity fund has had great success over the past several years - beating the Morgan Stanley All-Country World Index in five out of the last six calendar years. In its index-beating years, it didn't just squeak by, it beat the index by an average of nearly five percentage points. While that's not enough data to actually claim statistical proof, it 's quite impressive. How do they do it? Using a computer model based on several factors, Putnam ranks countries, sectors and individual stocks in order of relative attractiveness. So, it's really a combination of top-down country/sector selection and old-fashioned stock picking. No firm commitment is made to either growth or value - it's a blended approach that may be tilted one way or another at any time. Filled with financial stocks, consumer staples (more defensive), and a few high quality tech stocks, Putnam expects the earnings outlook for most sectors to remain volatile the rest of this year. They remain cautious about Japan despite its recent rally and maintain an underweight position in the struggling country. Overall, it' s a well-diversified fund - albeit more costly than the others profiled here with a MER of 2.32 per cent.

Though each of these is a no-load fund, each of these should be available through most financial advisors. Each of these funds pays a trailer fee to your advisor for advice and on-going monitoring and service.

Dan Hallett, CFA, CFP is the President of Dan Hallett & Associates Inc. in Windsor Ontario. DH&A is registered as Investment Counsel in Ontario and provides independent investment research to financial advisors. He can be reached at dha@danhallett.com
 
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Disclaimers: Consult with a qualified investment adviser before trading. Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, financial advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. More...