Investor's Business Daily, October 2nd, 2007
World equity funds returned 6.75% in September, putting them ahead of U.S. stock funds, which rose 3.53%.
Outsized returns from China and Latin America got most of the attention.
The two regions brought investors a return of 15.75% and 13.35% in the month, respectively.
For the quarter, China funds returned 28.87%, while Latin America funds rose 10.59%. Emerging markets funds returned 10.25% on the month and 11.75% on the quarter.
A sinking dollar and economic growth in much of the world helped drive up the numbers.
Increased demand for resources also helped boost many emerging market economies. In fact, natural resources and gold funds were the only non-regional asset classes to reach double-digit performance for the month.
But investors didn't need to be in emerging markets to benefit from their growth.
Demand Boosts Europe
Thomas Mengel is senior portfolio manager at Waddell & Reed, and runs its $838 million Advisor International Growth UNCGX fund, which returned 7.88% on the month, 8.09% for the quarter and 21.05% year to date.
While Mengel is overexposed relative to his benchmark in emerging markets such as China, he also bought stocks in mature markets that directly benefit from emerging market demand.
Switzerland's ABB ABB supplies industrial equipment. ABB's American depositary receipts are up 51% this year, though the fund invests in its local market shares.
German cement maker Holcim is another success, Mengel says. Both ABB and Holcim benefit from the infrastructure building in China and Brazil.
Tom Roseen, senior analyst at Lipper, says that while European funds haven't had the eye-popping performance of emerging markets, they have done well year-to-date with a 13.38% return. They returned 1.11% for the quarter and 5.91% for the month.
Some of the uneven performance is due to the close link between European economies and the U.S., Roseen says. As the U.S. markets fell in the wake of the subprime mortgage meltdown and a credit crunch, many European exchanges followed. The European Union and the U.S. are among each others' biggest trading partners as well.
But if the dollar keeps falling, investors in the U.S. will be more willing to invest in overseas funds because of the currency boost to returns, Roseen says.
Links to emerging markets also will benefit European multinationals.
Global growth hasn't done much for Japan funds, which gained 1.40% for the month but fell 3.23% on the quarter.
Paul Hechmer, portfolio manager at Nuveen Investments, feels Japan is a good bet.
He has overweighted the $970 million Nuveen Tradewinds International Value NAIGX fund's allocation to Japan relative to its benchmark, the MSCI EAFE Index. The fund has 28.4% of its assets in that country.
The fund has returned 7.67% in September and 4.54% in the third quarter.
Hechmer says the euro has been appreciating against the yen, which will help Japanese exporters.
In January, the euro was trading between 156 and 158 yen. It topped out at 168.60 in July, tumbled to 152 in August, but has since jumped back to close at about 163 yen on Oct. 2.
Japan's economy has also been in the doldrums a long time.
"The second largest economy in the world has been in recession for 15 years," he said. "Do you want to bet that it will stay that way another 15 years?"
Even though Japanese consumers are famous for saving rather than buying, Hechmer thinks they will do so as more of them retire and pent-up demand makes itself felt.
"People are realizing they haven't bought anything for 15 years," he said.
The fall in the yen also has made Japanese stocks cheaper relative to their European counterparts.
That has made him put more money into Japanese consumer stocks such as Takefuji Corp., a consumer finance company, which is 2.23% of the fund.
Heavy Metal Fans
Hechmer also is betting on metals. Among the stocks in that area are the U.K.'s Rio Tinto RTP and Australia-based Alumina AWC and Ivanhoe Mines IVN.
Commodities have had a good run, he says. He doesn't expect a commodity price collapse like that of the 1990s because the increased prices haven't changed the supply, which is getting smaller.
Gold funds were out of favor when the markets did well, but returned 20.8% in September.
Lipper's Roseen says the commodity price run-up, a falling dollar and market volatility have pushed investors to gold funds.
