Rogue Missives -- Thursday, March 27, 1997 -- Is the Global Now Local? by Louis Corrigan (RgeSeymour)

Rogue Missives

ROGUE ARCHIVES

Thursday, March 27, 1997

Is the Global Now Local?
by Louis Corrigan (RgeSeymour)
Most creative writing instructors offer the same advice: write about what you know. While imagination can take you a long way, it's best to ground your writing in something close to a reality you live and breathe.
The same advice applies to investing. Invest in what you know is the distilled version of the stock-picking approach practiced by Peter Lynch, the revered former manager of Fidelity Investments' once-great Magellan Fund. Indeed, Lynch's well-known position is that individual investors often have a jump on Wall Street's institutional investors, who tend to follow the herd and live too little in the daily world to even notice some hot new products or businesses until the company's stock has already soared.
Small-town investment clubs, for example, made a killing on WAL-MART <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMT)") else Response.Write("(NYSE: WMT)") end if %> before many professional investors had any idea the company would soon rule the retailing roost. Since the company buttered its bread in America's rural heartland, sophisticated city-dwellers were actually some of the last to understand what Wal-Mart was doing to retailing in America.
This "think locally" strategy has led many an investor to take notice when a sister-in-law reports that the widget manufacturing plant where she works has started running double shifts. Even investors without such inside contacts have learned to keep a close eye on local papers, which often report the first signs of an undiscovered gem's future glory.
While there's no place like home for practicing Lynchean investing, the approach really amounts to recognizing and taking advantage of one's special access to information. Online investor communities like those found around The Motley Fool, Silicon Investor, and other online forums, have extended that special access by putting investors in contact with a thousand sisters-in-law. The explosion of financial media services and other Web-based resources has also broadened the universe of companies that private investors can reasonably keep track of.
Indeed, our concept of local knowledge is on the way to becoming as globalized as the world economy. Differential access to information still exists, and an individual investor may still find it impossible to reproduce a local's insights from 10,000 miles away. But increasingly, the only factor limiting an investor's horizon is the willingness to do some research. The new wired world order, it seems, has come just in time, too.
GOING GLOBAL
The latest mantra coming from Wall Street is to go global. John Templeton and others have promoted international investing for years, and done quite well for their investors. Still, the international approach has generally failed to live up to expectations, in part because the U.S. market has continued to perform so well, in part because many mutual funds investing in international markets have taken a large position in Japan, where equities have collapsed in recent years.
The numbers tell the general story. Morningstar has reported that the average international mutual fund averaged just 9.7% in annual returns over the past 10 years as compared to 13.3% a year for the U.S. S&P. Morgan Stanley's widely followed Europe, Australia, and Far East (EAFE) index rose just 3.8% last year, wildly underperforming U.S. stocks, due to continued weakness in Japan.
Still, professional money managers keep pushing global investing. The reasons are rather simple. Whereas U.S. stocks accounted for about two-thirds of the world stock market capitalization in the early 1970s, the numbers have reversed, with foreign markets now accounting for about 65% of the pie.
Investors who shun international equities are thus ignoring the majority of the world's investment opportunities, including many of the fastest-growing companies and markets. Over the last 20 years, for instance, the Hong Kong market has provided an annual return nearly 50% above even the stellar 13% return of the S&P 500. On a compounded basis, that kind of difference really adds up.
Last year, indexes of a number of international markets significantly outperformed the tremendous 20% return of the S&P 500 or the even better 26% of the Dow Jones Industrial Average. For example, based on local currencies, Russia saw stocks rise by 170%, Finland by 52%, Spain by 39%, Hong Kong by 33.5%, Hungary by 170%, Brazil by 64%, and China by 144%. A rising dollar dropped the pay-off somewhat for U.S. investors. In dollar terms, for example, Spain gained only 36.5%, Finland just 31.7%, and Hong Kong only 28.9%. Nonetheless, the opportunities look attractive.
Yet in addition to the possibility of making big money by looking overseas, Wall Street professionals often insist on the value of international investing as a way of diversifying one's portfolio, particularly with major U.S. stocks looking fully valued, if not overvalued. While foreign markets are hardly immune to the effects of a serious meltdown in U.S. equities, international markets are increasingly independent in their movements, driven by local political change, development projects, and regional economic conditions.
Indeed, academic studies have shown that a portfolio weighted with 75% U.S. stocks and 25% international stocks has produced slightly higher annual returns with less overall volatility. Currently, many professionals are recommending that U.S. investors should have 15% to 35% of their assets in international equities.
International markets are also hot because of the developing perception that the world may be entering a new capitalist golden age. Communist and socialist regimes the world over have rapidly been replaced by governments looking to move their countries toward free markets, unleashing a wave of privatization and attracting foreign investment in the process. Growing economies often make it easier for governments to practice fiscal restraint, which helps keep inflation and currency fluctuations relatively in check. Indeed, the U.S. multinationals that have seen their stocks rise the most may offer the surest sign of why global investing makes sense.
A slightly more cynical reading of the turn toward international investing is that the major mutual funds are looking to leverage their competitive advantage over the little guy on one of the few fronts where that advantage still exists. Just a hyperlink away, our fact-checking cuz EDGAR now provides individual investors with just about everything we need to know about specific U.S. equities. The Fool, the PR Wire, company Web sites, and major commercial wire services add supplementary context and timely news updates to flesh out the stories we want to follow.
With their authority being whittled away, Wall Street institutions, particularly the leading mutual fund companies, seem to have concluded that their international operations should make them experts at bringing the world to American investors. Most now offer a variety of international fund options.
The fund industry offers global equity funds that invest in all markets, including the U.S.; international equity funds that invest in all developed countries (including Canada, Japan, Australia, New Zealand, Western Europe) except the U.S.; emerging market funds that look to countries beyond the developed countries; plus regional funds that concentrate on the Pacific or Western Europe. There are also a number of country-specific funds. Some funds are actively managed, others simply try to track the leading local stock indexes. Some try to hedge against currency fluctuations while others don't.
Value Line currently follows over 650 international stock funds (for information, call 800-284-7607), as does Morningstar (call 312-696-6000). Charles Schwab offers Web updates on select mutual fund information and publishes a quarterly mutual fund performance guide, as do various financial publications. Web sites for The Vanguard Group and T. Rowe Price offer other good areas to explore.
Morgan Stanley also manages stock portfolios that mirror its own foreign-market indexes. These World Equity Benchmark Shares (WEBS) trade just like stocks on the American Stock Exchange and closely track the value of the underlying stock index. The company offers WEBS for 17 different international markets.
But as Fools know, individual investors can often do better than the stock indexes or the mutual fund managers. The Fool's own Stephen Barnes (MF Yon), our resident expert on foreign investments, suggests that the best way for individuals to go global is to buy shares in the foreign companies, such as SONY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SNE)") else Response.Write("(NYSE: SNE)") end if %>, that are listed on the U.S. exchanges. American Depository Receipts (ADRs) offer another good option.
ADRs represent a claim on a specific number of shares of a foreign company. A U.S. firm, such as Deutsche Bank's Deutsche Morgan Grenfell, sponsors the foreign issuer, literally serving as the depository for the shares on behalf of U.S. investors. Denominated in dollars, ADRs track the underlying security, fluctuating based on the combined effects of changes in share value and changes in exchange rates. Aside from ease of trading, another great advantage offered by ADRs is that issuers must meet the full registration standards of the Securities and Exchange Commission (SEC) as well as reconcile their accounting practices to the generally accepted accounting practices employed by U.S. firms.
ADRs are usually easy to follow, as well, with prices available through normal quote services on America Online or your broker. Online versions of Morningstar and First Call offer profiles and consensus earnings estimates, respectively.
Morningstar ADR, a regularly updated print source that's available by subscription or in your local library, covers more than 700 foreign companies which have stocks that trade as ADRs or are directly listed on U.S. exchanges. This excellent source is updated every two weeks in a ten-issue cycle. Each issue contains a summary section describing recent developments in international markets as well as detailed reviews of about 75 companies, with country profiles preceding each section of stocks. Subscriptions run about $195 (for information, call 800-876-5005). Both for an overview of ADR investment options and for detailed company information, it's a great place to start.
In MF Yon's judgment, 99.9% of individual investors are better off stopping at these ADRs and U.S. listed securities. The truly adventurous may seek to invest directly in foreign equities. One favorite practice is to look for infrastructure plays in developing countries such as China or India. The danger here is that it's often hard to know what you're getting. For one thing, relevant financial statements often don't follow standard U.S. accounting procedures, making typical valuation methods such as PE ratios almost useless.
Thrill seekers interested in following this course should probably take a look at The Dow Jones Guide to the World's Stock Markets (1996 edition, $34.95). This volume covers 27 nations, offering country introductions written by Dow Jones reporters and thumbnail profiles for 2,700 companies composed by Morningstar. Other useful reference materials include Nelson's Directory of Investment Research (for information, call 800-333-6357, $535) which offers very brief profiles for thousands of companies, country by country.
Kim Haksu's Fundamental Analysis Worldwide: Investing and Managing Money in International Capital Markets (John Wiley & Sons, 1996) offers general market data on European countries, with a special focus on information sources, accounting practices, and financial reporting practices. The book goes through sample financial statements for a variety of companies in each country (for example, consumer products, industrial products, and banking) and even includes English-language translations of the financial statements if you want to really go it alone.
Charles Schwab and most other discount brokers have foreign trading desks that have no trouble trading international securities with basically the same cost structure employed for U.S. securities. But since they trade through other market makers, the spreads are usually wider than you see on U.S. markets.
One of the major uncertainties of global investing is one that faces U.S. multinationals all the time but generally goes unnoticed by investors: currency fluctuations. That's because trades involve the extra step of exchanging dollars for local currency, or vice versa. If the dollar rises in value against the local currency, then a buyer of foreign securities can buy more shares for the same amount of money. In the same circumstances, however, a seller will find that gains in the foreign equity will have been somewhat offset by the foreign currency's weakness against the dollar.
Consider two examples from T. Rowe Price's good introduction to international investing. During the three-month period ending March 31, 1996, the German market rose by 9.4%. But the German mark dropped 3.9% against the dollar, meaning that the dollar return to U.S. investors was just 5.1%. During this same period, the Australian index turned in merely a 0.6% gain, but the local currency rose 5.5% against the dollar, leading to a real return in dollars of 6.1%.
International investing is ultimately a bet on foreign businesses and economies, but there's also a degree of currency speculation thrown into the mix to keep an investor on her toes. If this seems like an area best left to George Soros and other globe-trotting financiers with insight into the thinking of the world's central bankers, perhaps you'll do better sticking to Wall Street's foreign investment vehicles.
But if you're looking for adventure, some additional online sources should help you chart your course and begin learning how to make thinking globally seem more like acting locally. America Online's international financial news center offers a good jumping off spot for keeping in touch with foreign market activity. Look especially at the Dow Jones International News and MNC International. Also check out The Economist Intelligence Unit, which covers 35 individual countries, offering some basic economic and political background for interested investors.
As online resources improve and more foreign companies adopt accounting standards and governance structures like those of U.S. companies, global investing should begin to make even more sense for individual investors looking to buy specific equities.
On the other hand, Warren Buffett has made a living off the idea that broad diversification is not always the best way to hedge away the inherent information imbalances and uncertainties of investing. Sometimes an investor is better off buying a handful of equities whose management and business he knows inside and out. In that respect, ADRs may offer the best opportunity for individual investors looking to go global.

--Louis Corrigan (RgeSeymour)

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ROGUE ARCHIVES

Thursday, March 27, 1997
Is the Global Now Local? by Louis Corrigan (RgeSeymour) Most creative writing instructors offer the same advice: write about what you know. While imagination can take you a long way, it's best to ground your writing in something close to a reality you live and breathe. The same advice applies to investing. Invest in what you know is the distilled version of the stock-picking approach practiced by Peter Lynch, the revered former manager of Fidelity Investments' once-great Magellan Fund. Indeed, Lynch's well-known position is that individual investors often have a jump on Wall Street's institutional investors, who tend to follow the herd and live too little in the daily world to even notice some hot new products or businesses until the company's stock has already soared. Small-town investment clubs, for example, made a killing on WAL-MART <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMT)") else Response.Write("(NYSE: WMT)") end if %> before many professional investors had any idea the company would soon rule the retailing roost. Since the company buttered its bread in America's rural heartland, sophisticated city-dwellers were actually some of the last to understand what Wal-Mart was doing to retailing in America. This "think locally" strategy has led many an investor to take notice when a sister-in-law reports that the widget manufacturing plant where she works has started running double shifts. Even investors without such inside contacts have learned to keep a close eye on local papers, which often report the first signs of an undiscovered gem's future glory. While there's no place like home for practicing Lynchean investing, the approach really amounts to recognizing and taking advantage of one's special access to information. Online investor communities like those found around The Motley Fool, Silicon Investor, and other online forums, have extended that special access by putting investors in contact with a thousand sisters-in-law. The explosion of financial media services and other Web-based resources has also broadened the universe of companies that private investors can reasonably keep track of. Indeed, our concept of local knowledge is on the way to becoming as globalized as the world economy. Differential access to information still exists, and an individual investor may still find it impossible to reproduce a local's insights from 10,000 miles away. But increasingly, the only factor limiting an investor's horizon is the willingness to do some research. The new wired world order, it seems, has come just in time, too. GOING GLOBAL The latest mantra coming from Wall Street is to go global. John Templeton and others have promoted international investing for years, and done quite well for their investors. Still, the international approach has generally failed to live up to expectations, in part because the U.S. market has continued to perform so well, in part because many mutual funds investing in international markets have taken a large position in Japan, where equities have collapsed in recent years. The numbers tell the general story. Morningstar has reported that the average international mutual fund averaged just 9.7% in annual returns over the past 10 years as compared to 13.3% a year for the U.S. S&P. Morgan Stanley's widely followed Europe, Australia, and Far East (EAFE) index rose just 3.8% last year, wildly underperforming U.S. stocks, due to continued weakness in Japan. Still, professional money managers keep pushing global investing. The reasons are rather simple. Whereas U.S. stocks accounted for about two-thirds of the world stock market capitalization in the early 1970s, the numbers have reversed, with foreign markets now accounting for about 65% of the pie. Investors who shun international equities are thus ignoring the majority of the world's investment opportunities, including many of the fastest-growing companies and markets. Over the last 20 years, for instance, the Hong Kong market has provided an annual return nearly 50% above even the stellar 13% return of the S&P 500. On a compounded basis, that kind of difference really adds up. Last year, indexes of a number of international markets significantly outperformed the tremendous 20% return of the S&P 500 or the even better 26% of the Dow Jones Industrial Average. For example, based on local currencies, Russia saw stocks rise by 170%, Finland by 52%, Spain by 39%, Hong Kong by 33.5%, Hungary by 170%, Brazil by 64%, and China by 144%. A rising dollar dropped the pay-off somewhat for U.S. investors. In dollar terms, for example, Spain gained only 36.5%, Finland just 31.7%, and Hong Kong only 28.9%. Nonetheless, the opportunities look attractive. Yet in addition to the possibility of making big money by looking overseas, Wall Street professionals often insist on the value of international investing as a way of diversifying one's portfolio, particularly with major U.S. stocks looking fully valued, if not overvalued. While foreign markets are hardly immune to the effects of a serious meltdown in U.S. equities, international markets are increasingly independent in their movements, driven by local political change, development projects, and regional economic conditions. Indeed, academic studies have shown that a portfolio weighted with 75% U.S. stocks and 25% international stocks has produced slightly higher annual returns with less overall volatility. Currently, many professionals are recommending that U.S. investors should have 15% to 35% of their assets in international equities. International markets are also hot because of the developing perception that the world may be entering a new capitalist golden age. Communist and socialist regimes the world over have rapidly been replaced by governments looking to move their countries toward free markets, unleashing a wave of privatization and attracting foreign investment in the process. Growing economies often make it easier for governments to practice fiscal restraint, which helps keep inflation and currency fluctuations relatively in check. Indeed, the U.S. multinationals that have seen their stocks rise the most may offer the surest sign of why global investing makes sense. A slightly more cynical reading of the turn toward international investing is that the major mutual funds are looking to leverage their competitive advantage over the little guy on one of the few fronts where that advantage still exists. Just a hyperlink away, our fact-checking cuz EDGAR now provides individual investors with just about everything we need to know about specific U.S. equities. The Fool, the PR Wire, company Web sites, and major commercial wire services add supplementary context and timely news updates to flesh out the stories we want to follow. With their authority being whittled away, Wall Street institutions, particularly the leading mutual fund companies, seem to have concluded that their international operations should make them experts at bringing the world to American investors. Most now offer a variety of international fund options. The fund industry offers global equity funds that invest in all markets, including the U.S.; international equity funds that invest in all developed countries (including Canada, Japan, Australia, New Zealand, Western Europe) except the U.S.; emerging market funds that look to countries beyond the developed countries; plus regional funds that concentrate on the Pacific or Western Europe. There are also a number of country-specific funds. Some funds are actively managed, others simply try to track the leading local stock indexes. Some try to hedge against currency fluctuations while others don't. Value Line currently follows over 650 international stock funds (for information, call 800-284-7607), as does Morningstar (call 312-696-6000). Charles Schwab offers Web updates on select mutual fund information and publishes a quarterly mutual fund performance guide, as do various financial publications. Web sites for The Vanguard Group and T. Rowe Price offer other good areas to explore. Morgan Stanley also manages stock portfolios that mirror its own foreign-market indexes. These World Equity Benchmark Shares (WEBS) trade just like stocks on the American Stock Exchange and closely track the value of the underlying stock index. The company offers WEBS for 17 different international markets. But as Fools know, individual investors can often do better than the stock indexes or the mutual fund managers. The Fool's own Stephen Barnes (MF Yon), our resident expert on foreign investments, suggests that the best way for individuals to go global is to buy shares in the foreign companies, such as SONY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SNE)") else Response.Write("(NYSE: SNE)") end if %>, that are listed on the U.S. exchanges. American Depository Receipts (ADRs) offer another good option. ADRs represent a claim on a specific number of shares of a foreign company. A U.S. firm, such as Deutsche Bank's Deutsche Morgan Grenfell, sponsors the foreign issuer, literally serving as the depository for the shares on behalf of U.S. investors. Denominated in dollars, ADRs track the underlying security, fluctuating based on the combined effects of changes in share value and changes in exchange rates. Aside from ease of trading, another great advantage offered by ADRs is that issuers must meet the full registration standards of the Securities and Exchange Commission (SEC) as well as reconcile their accounting practices to the generally accepted accounting practices employed by U.S. firms. ADRs are usually easy to follow, as well, with prices available through normal quote services on America Online or your broker. Online versions of Morningstar and First Call offer profiles and consensus earnings estimates, respectively. Morningstar ADR, a regularly updated print source that's available by subscription or in your local library, covers more than 700 foreign companies which have stocks that trade as ADRs or are directly listed on U.S. exchanges. This excellent source is updated every two weeks in a ten-issue cycle. Each issue contains a summary section describing recent developments in international markets as well as detailed reviews of about 75 companies, with country profiles preceding each section of stocks. Subscriptions run about $195 (for information, call 800-876-5005). Both for an overview of ADR investment options and for detailed company information, it's a great place to start. In MF Yon's judgment, 99.9% of individual investors are better off stopping at these ADRs and U.S. listed securities. The truly adventurous may seek to invest directly in foreign equities. One favorite practice is to look for infrastructure plays in developing countries such as China or India. The danger here is that it's often hard to know what you're getting. For one thing, relevant financial statements often don't follow standard U.S. accounting procedures, making typical valuation methods such as PE ratios almost useless. Thrill seekers interested in following this course should probably take a look at The Dow Jones Guide to the World's Stock Markets (1996 edition, $34.95). This volume covers 27 nations, offering country introductions written by Dow Jones reporters and thumbnail profiles for 2,700 companies composed by Morningstar. Other useful reference materials include Nelson's Directory of Investment Research (for information, call 800-333-6357, $535) which offers very brief profiles for thousands of companies, country by country. Kim Haksu's Fundamental Analysis Worldwide: Investing and Managing Money in International Capital Markets (John Wiley & Sons, 1996) offers general market data on European countries, with a special focus on information sources, accounting practices, and financial reporting practices. The book goes through sample financial statements for a variety of companies in each country (for example, consumer products, industrial products, and banking) and even includes English-language translations of the financial statements if you want to really go it alone. Charles Schwab and most other discount brokers have foreign trading desks that have no trouble trading international securities with basically the same cost structure employed for U.S. securities. But since they trade through other market makers, the spreads are usually wider than you see on U.S. markets. One of the major uncertainties of global investing is one that faces U.S. multinationals all the time but generally goes unnoticed by investors: currency fluctuations. That's because trades involve the extra step of exchanging dollars for local currency, or vice versa. If the dollar rises in value against the local currency, then a buyer of foreign securities can buy more shares for the same amount of money. In the same circumstances, however, a seller will find that gains in the foreign equity will have been somewhat offset by the foreign currency's weakness against the dollar. Consider two examples from T. Rowe Price's good introduction to international investing. During the three-month period ending March 31, 1996, the German market rose by 9.4%. But the German mark dropped 3.9% against the dollar, meaning that the dollar return to U.S. investors was just 5.1%. During this same period, the Australian index turned in merely a 0.6% gain, but the local currency rose 5.5% against the dollar, leading to a real return in dollars of 6.1%. International investing is ultimately a bet on foreign businesses and economies, but there's also a degree of currency speculation thrown into the mix to keep an investor on her toes. If this seems like an area best left to George Soros and other globe-trotting financiers with insight into the thinking of the world's central bankers, perhaps you'll do better sticking to Wall Street's foreign investment vehicles. But if you're looking for adventure, some additional online sources should help you chart your course and begin learning how to make thinking globally seem more like acting locally. America Online's international financial news center offers a good jumping off spot for keeping in touch with foreign market activity. Look especially at the Dow Jones International News and MNC International. Also check out The Economist Intelligence Unit, which covers 35 individual countries, offering some basic economic and political background for interested investors. As online resources improve and more foreign companies adopt accounting standards and governance structures like those of U.S. companies, global investing should begin to make even more sense for individual investors looking to buy specific equities. On the other hand, Warren Buffett has made a living off the idea that broad diversification is not always the best way to hedge away the inherent information imbalances and uncertainties of investing. Sometimes an investor is better off buying a handful of equities whose management and business he knows inside and out. In that respect, ADRs may offer the best opportunity for individual investors looking to go global. --Louis Corrigan (RgeSeymour)