Two global investment firms have structured global investment offerings around open-end index funds that trade on New York-based stock exchanges.
Investment managers at Murray Johnstone International, Glasgow, Scotland, use both CountryBaskets Index Funds and World Equity Benchmark Shares. Calport Asset Management, Westport, Conn., relies primarily on WEBS.
CountryBaskets Index Funds Inc. portfolios are managed by Deutsche Morgan Grenfell/C.J. Lawrence Inc., New York, around nine of the FT/S&P Actuaries World Indexes, with shares of the open-end mutual funds traded on the New York Stock Exchange.
WEBS are managed by BZW Barclays Global Fund Advisors, San Francisco, around 17 of the Morgan Stanley Capital International global indexes.
Murray Johnstone managers use a top-down method to create portfolios with equal weightings to six countries, as ranked by an internal valuation process. That produces focused international portfolios, officials there said.
Calport also uses a top-down method for its global portfolios. Managers try to examine the effects global shocks will have on asset values worldwide and invest around those expectations.
James Clunie, investment manager for Murray Johnstone, said the firm deliberately chose CountryBaskets and WEBS over alternatives such as exchange-traded futures and over-the-counter swaps.
"We can do that, but we'd rather not," Mr. Clunie said in reference to using derivatives.
The investment firm uses futures to equitize its cash in some portfolios, but is leery of basing a whole strategy on derivatives, he said.
That's because of some clients' reactions to heavy derivatives use.
"Generally our clients tend to be anti-derivative," he said.
The negative perceptions of derivatives can weigh against a manager if there are any periods of underperformance, Mr. Clunie said.
Some clients are restricted in the amount of futures or OTC derivatives that can be held in their portfolios. CountryBaskets and WEBS do not fall into that category, he said.
In addition, CountryBaskets and WEBS are custodied and traded in New York, unlike individual foreign stocks, which can have high custodial fees.
CountryBaskets and WEBS tend to have lower spreads than individual American depository receipts, as well, Mr. Clunie said.
The spreads remain tighter because, unlike exchange-traded closed-end funds, arbitrage opportunities are offered for large dealers, who can take advantage of any discounts to the net asset value that might develop over time.
Moreover, liquidity is boosted by the opportunity for arbitrage with futures markets, CountryBaskets executives say.
Both CountryBaskets and WEBS were launched in March. As of Sept. 30, CountryBaskets had $254 million invested in Australia, France, Germany, Hong Kong, Italy, Japan, South Africa, the United Kingdom and the United States. Executives also are considering CountryBaskets for Malaysia, Singapore, Thailand, Spain, Switzerland, Norway, Belgium, Canada and Sweden, and for the regions of Pacific Rim excluding Japan, the Nordic countries and Latin America, said Laura Friedman, head of institutional marketing.
WEBS had $258 million invested as of Sept. 30 in the equity markets of Australia, Austria, Belgium, Canada, France, Germany, Hong Kong, Italy, Japan, Malaysia, Mexico, the Netherlands, Singapore, Spain, Sweden, Switzerland and the United Kingdom.
Although WEBS do not include the United States, the American Stock Exchange already offers Standard & Poor's depository receipts for the S&P 500, with $1.1 billion under management, and for the S&P MidCap 400, with $400 million under management.
CountryBaskets expenses are capped across the board at 100 basis points. WEBS fees range from 85 to 90 basis points.
Michael Petrino, president of Calport, said 90% of its global equity portfolios use WEBS, because the benchmark is the MSCI World Index. For countries without a WEBS product, they'll try to create index returns with individual stock names, he said.
Although Calport can invest in emerging markets, it currently isn't invested in any, Mr. Petrino said.
At Murray Johnstone, the index fund preferences of its managers depends on the differences between the bid-offer spread, which carries the most weight, and the difference between the NAV and the exchange price of the actual security, Mr. Clunie said.
"Usually the CountryBasket comes out best," he said, even though trading is relatively infrequent in the focused international strategy.
Murray Johnstone formally runs its investment models once a month, although in extreme circumstances - a currency devaluation being one example - executives will run it more often.
The firm's selection process examines 20 factors regarding a country's macroeconomic and monetary conditions, and its price valuations and past performance. Murray Johnstone has $3 billion invested using that strategy. The most recent action was the movement of one-sixth of all portfolios to Belgian WEBS from U.K. CountryBaskets.
The fund's other five allocations in the strategy are to CountryBaskets in Australia and Hong Kong, and WEBS in Canada, Spain and Singapore.
Mr. Clunie said clients in other areas are considering Murray Johnstone's focused international portfolio for possible allocations. He said the strategy works well as a complement to an existing core EAFE strategy.
Using back-testing of Murray Johnstone's already published monthly country selections, the strategy outperformed the Morgan Stanley Capital International Europe Australasia Far East index by more than 550 basis points for the five years ended Sept. 30, with standard deviations that are similar to the EAFE. (That includes estimates for transaction costs and management fees within the Country Baskets and WEBS, but not fees charged by Murray Johnstone).
