U.S. mutual funds that invest in other countries' stock markets regained a little of their lost cachet this year.
These international funds, which invest strictly outside the United States, are on course to outperform funds concentrating on U.S. stocks for the first time in six years. Now, to hear some fund executives tell it, they are ready to build on that recovery in 2000, and maybe beyond.
"I think emphasizing international investing would be a good thing right now," said Theresa Hamacher, chief investment officer at Pioneer Investment Management Inc., which runs a Boston-based fund group with $21 billion in assets. "International markets have been underperforming. Now they're beginning to outperform."
The Bloomberg average of almost 500 diversified international stock funds has gained 26 percent this year through Thursday, outpacing the average of more than 1,400 U.S. growth funds by 7 percentage points.
The leader of the pack is the $178 million T. Rowe Price International Discovery Fund, which specializes in small companies and has gained 110 percent since the start of the year.
Pacific Region funds have jumped 71 percent, and emerging-markets funds 43 percent. A half-dozen funds specializing in Japanese stocks have doubled or tripled, paced by the $197 million Warburg Pincus Japan Small Company Fund, up 228 percent.
Among the emerging-markets funds, the Class A shares of Pioneer's $37 million Indo-Asia Fund have been the top performer, up 82 percent.
Even with gains like that, international funds still have a long way to go to catch up with U.S. stock funds' bull-market gains. In the past five years, Bloomberg's average of diversified international stock funds rose an average of 13 percent a year, scarcely more than half the 22 percent return posted by U.S. growth funds.
So it stands to reason that many investors will take a while to warm up to international funds. At New York's U.S. Trust Co., which has managed money for wealthy people for nearly 150 years, "a willingness to invest internationally is just beginning to come back," said Fred Taylor, chief investment officer.
John Ballen, chief executive of Boston-based MFS Investment Management, which runs about $125 billion in funds and other investments, is still in the show-me camp. With a much better economic performance than most other countries, "the U.S. market has led the world for a very good reason," he said.
"International has some stuff to prove," Ballen said. "International funds should be in people's portfolios for diversification, but they should be a relatively small part of the portfolio."
Taylor at U.S. Trust, which manages $77 billion including almost $10 billion in mutual funds, argues that relative economic performance may be about to change.
"I think the U.S., which has been the major engine of the world lately, will slow a bit," he said at a year-end meeting with reporters. "We think the rest of the world will do better than the U.S. next year in terms of stock-market performance."
Taylor said he believes many U.S. investors are still too insular in their view of the world. In the past two years, he said, he has been pushing U.S. Trust analysts to devote at least 10 percent of their research to companies based outside the United States.
"I don't believe in giving generic investment advice, but international funds should have a role in a portfolio," said Lawrence Lasser, chief executive of Putnam Investment Management Inc., which manages a $260 billion fund family. "There are huge opportunities outside the U.S."
Many fund managers are backing up those words by making a sales pitch for new investors in Asia and Europe. "Whatever happened in the U.S. is capable of happening in other parts of the world," Lasser said.
If international funds have beena disappointment lately as moneymakers, they have lived up to their billing as investments that follow a different path than U.S. funds.
Over the past five years, in their local currencies, the U.S. Standard & Poor's 500-stock index has averaged an annual return of 27.5 percent, while the Nikkei 225 index in Japan has averaged a 0.4 percent loss.
You can't get much more divergent that that.