They're Hot in the U.S. But Even Hotter Abroad

By Jonathan Burton

As robust as investments in mutual funds based in U.S. stocks have been, their growth seems anemic compared with the boom in overseas funds. On average, foreign mutuals have soared nearly 30% so far this year. A distinct scent of euphoria surrounds "emerging markets" in Asia and Latin America, as U.S. money cascades in and pushes them to new heights. As this speculative bandwagon gathers speed, more investors clamber aboard. Americans plowed a record $7 billion into overseas funds in 1992, plus $21.7 billion more in the first nine months of this year. It's hard to argue with double-digit gains, no matter where they are.

But the boom abroad may be quieting. "Of course it won't keep up," says Ralph Wanger, manager of the Acorn International Fund, up 35% to date. "Thirty percent returns are much higher than anybody has any reason to expect."

Spreading risk is prudent investment strategy. But the latest contingent of global explorers is less interested in diversifying risk than in chasing returns. Says David Herro, who runs the Oakmark International Fund: "It's almost scary what's happening today. They're shooting first and asking questions later."

For those who bother to ask, the answers can be sobering. Investing abroad involves risks not found in the U.S. -- currency swings, political instability and limited information among them. Particularly in smaller markets, liquidity can be a problem. At the first hint of trouble, investors could blanket international funds with redemptions. Unlike mature exchanges in New York, London or Tokyo, many young foreign bourses may not be able to handle a big sell-off. "It's as if you walk into your neighborhood Burger King at 11:30 and say, 'I would like 400 hamburgers, please,' " quips Acorn manager Wanger.

With the best gains apparently behind them, should U.S. investors pull out of foreign funds? Not entirely. John Markese, president of the American Association of Individual Investors, advocates keeping up to a third of a portfolio in foreign assets. Spread risk among regions; don't bet the ranch all at once, he counsels, and keep an investment horizon of at least five years. Some emerging markets -- particularly in Asia and South America -- are likely to outperform the U.S. and Europe. But creating the wealth of nations takes time. After all, as they say, Rome wasn't built in a day.