By the 21st century, Americans will be investing abroad as comfortably as they do at home. Some of you are there already. Last year $13.7 billion poured into foreign stocks, up a huge 813 percent from 1988. For the timid, here are four strong reasons for exporting maybe 20 or 30 percent of your money:
(1) To own a piece of other countries' good fortune. Right now, economic growth in Australia and parts of Europe, Asia and Latin America is faster than growth in the United States.
(2) To invest in other currencies. When the dollar declines, as it has recently, foreign securities are especially strong. Adjusted for dollar changes, five foreign markets bested ours during the 1980s: those of Japan, Holland, the United Kingdom, France and Germany, in that order.
(3) To invest in the world's strongest regional trends. They include: the emergence of Western Europe as an economic superpower. The rebuilding of Eastern Europe. The growth of consumer markets in Asia, as its armies of workers rise to the middle class. Rapid growth in low-wage countries whose governments welcome private investment.
(4) To reduce the risk to your investments overall. Foreign markets are often strong when U.S. markets are weak, and vice versa. If you're invested in several countries, your risk is less than if you were in one alone.
When you buy foreign securities, you are not only hoping that those markets will rise. You are also making a bet on the international value of the dollar. A rising dollar hurts your investment; a falling dollar means extra profits.
Take a $100 German stock whose German price remains unchanged. If the dollar drops by 5 percent, the American price will go to $105--because each mark is now worth a larger number of dollars. Conversely, if the dollar rises by 5 percent, your $100 stock will drop to $95--because each mark is now worth fewer dollars.
Investment gains or losses in foreign markets come in two parts--changes in the market itself and changes in currency values. Together, they make up your total yield. In the second quarter, for example, the French stock market rose 3.6 percent and the falling dollar added 2.4 percent to the value of the franc. So the return to dollar investors came to 6 percent, according to Morgan Stanley Capital International.
The simplest way to invest abroad is through diversified, open-end mutual funds that always trade at the net-asset value of the securities they own. An "international" fund buys securities everywhere but in the United States. A "global" fund buys worldwide, including the United States. A "regional" fund sticks to a small group of countries, like Europe or the Pacific Rim. Among the favorites of Morningstar, Inc., which tracks open-end fund performance: &udder Global, Ivy International and Trustees' Commingled International Equity, all with no upfront sales charge. The Vanguard Group, Valley Forge, Pa., offers two international "index" funds, which are funds that mimic markets overall. One covers Europe; one covers Asia and Australia.
Buy discounts: Single-country funds tend to be closed-ends, which trade like stocks. If their market price is higher than the net-asset value of the securities they hold, they're said to be trading "at a premium." If the market price is lower, they're "at a discount."
When you buy at a premium (or when the fund is newly issued), you're setting yourself up for a fall--because these funds almost always drop to discounts, eventually. When they're deeply discounted, they're often a buy. Among the current favorites of closed-end specialist Thomas J. Herzfeld: the speculative First Philippine Fund (16 percent discount) and the Irish Investment Fund (14 percent discount). Some diversified funds are also closed-ends, including Clemente Global Growth, Alliance New Europe, Scudder New Europe and Worldwide Value, also at attractive discounts.
Thomas Keyes, coauthor of "The Global Investor" (292 pages. Longman., $29.95), calls closed-ends the best way of playing developing countries like Mexico which, during most of the 1980s, boasted the world's most profitable market. At present, however, the Mexico Fund sells at a premium.
Foreign-bond funds are an interesting speculation today. They should make you some money if international interest rates fall. But if you're after steady income, stay away. Their high yields will shrink whenever the dollar gets strong.
For the blood sport of picking individual stocks, try:
U.S. multinational corporations--an armchair way for your money to travel. Look for major U.S. companies that earn a large percentage of their profits abroad. Just a few examples: IBM, Coca-Cola, Microsoft, Procter & Gamble and McDonald's. Owning them also gives you a currency play. Their foreign earnings are worth more when the dollar declines and less when the dollar rises.
Canadian stocks trading on U.S. exchanges--the only foreign shares to be listed directly. They include Alcan Aluminium, Canadian Pacific and Seagram.
American depositary receipts (ADRs)--issued by banks against foreign shares. You buy and sell the ADRs as if they were the stocks themselves. More than 800 ADRs now trade in this country, up from about 150 in 1961. Some are listed on stock exchanges; most trade through the Pink Sheets, where dealers quote prices over the counter.
Around 220 ADRs are sponsored by the companies themselves. They give you American-style financial information (although not as quickly) and pick up the cost of administering the securities. The remaining ADRs are unsponsored, meaning that they're managed by a bank without company involvement. With unsponsored ADRs, you usually get no financial reports, and the price of administering them is deducted from your dividends. The ADRs of some pretty big companies are unsponsored, including Deutsche Bank, Mitsubishi Electric and Nestle. (Incidentally, John Dessauer, publisher of Dessauer's Journal, thinks that Nestle is likely to move from the Pink Sheets to the New York Stock Exchange, which would help its price.)
Many of the listed ADRs, like Unilever, attract a lot of buyers. But pink-sheet issues are often illiquid--forcing sellers to take a haircut on the price. In general, you should go for actively traded, sponsored ADRs on the formal exchanges.
But mutual funds or ADRs, the question is no longer whether to invest abroad. It's only what to buy, and when.