Despite lackluster performance, flows into international and global mutual funds are up more than 500% this year --thanks in large part to Janus and American Funds, which have captured more than 50% of new international and global assets.
Year-to-date through April 30, $39.6 billion flowed into international and global mutual funds, according to Financial Research Corp., Boston. For the same four-month period in 1999, these funds saw $8.9 billion in outflows, according to FRC. The first-quarter intake was $34.4 billion, more than the previous two years combined.
But while inflows have been strong this year, performance generally has been weak.
Year-to-date through May 31, every category of Lipper's world equity funds, except Canadian Funds, is down. International funds returned -7.1% for the period, global funds -3.5%, emerging markets funds -11.6%, European region funds -0.25% and Japanese funds -15.1%, according to Lipper.
David Haywood, analyst at FRC, said the increased inflows this year may be due to strong performance by international funds last year. "People really haven't been thinking about international products because the domestic market has done so well," he said.
But strong performance last year may have encouraged investors to take a second look and helped money management firms get the "marketing engines" going.
Year-to-date through April, the big winners have been Janus Corp., Denver, and American Funds, owned by Capital Research & Management Co., Los Angeles. With $14.2 billion and $6.3 billion, respectively, in new assets, Janus and American Funds accounted for more than half of international fund inflows year-to-date through April 30.
At Janus, the fund attracting attention was the $42 billion Janus Worldwide Fund, managed by Helen Young Hayes and Laurence Chang, until it was closed to new investors in May. Although the fund returned -3.2% year-to-date through May 31, it posted annualized returns of 50.3%, 28.8% and 29.1%, respectively, for the one-, three- and five-year periods ended May 31. Janus spokesman Jeff Snyder believes the large inflows can be attributed to the superior long-term performance of the fund.
Another factor that may be contributing to increased international/global fund flows is portfolio rebalancing. Mr. Haywood said some investors may be re-aligning portfolios whose allocations have gotten out of whack due to last year's outperformance.
Paul Quinsee, product manager for international equity at J.P. Morgan, said that going forward, investors may find better valuations in international markets and more potential for profits in Europe and Asia than in the United States. "The profitability is so high already in domestic markets, it's going to be very difficult for companies to gain that much more," said Mr. Quinsee. On the other hand, he said, there's more potential for economic growth in Europe and Asia.
In Europe, equity returns have suffered this year due to the weakness of the euro, he said. "We'd be surprised if the euro got much weaker than it has been recently."
While the weak euro has hurt returns, the common currency in Europe has had an effect on corporate restructuring, as 1999 was a record year for mergers and acquisitions. "It has made companies think more about their position in the region rather than within just one country," he said.
Another factor for underperformance in Europe, as well as in other markets, has been what Mr. Quinsee calls "TMT": technology, media and telecommunications. In the last six to nine months, he said, these industries have dominated markets around the world, which is why foreign markets have appeared to move in step with domestic markets in recent months.
Among institutional investors, Mr. Quinsee has noticed a trend toward more broadly based mandates, such as the Morgan Stanley Capital International All Country World index (ex-U.S.), which tracks the MSCI Europe Australasia Far East index as well as emerging markets. Conversely, he is seeing less interest in global mandates. "Domestic institutions keep a very clear distinction between domestic stocks and international stocks," he said.
Morgan saw its non-U.S. fund flows increase two-fold to $80.9 million through the first four months of the year.
American Century Investments, Kansas City, Mo., saw $1.4 billion flow into global/international funds between Jan. 1 and April 30, up from $94 million for the same period last year. That $1.4 billion is the fourth-highest amount, behind Janus, American Funds and Putnam Investments Inc., Boston, which has attracted $4.3 billion in inflows.
Another reason for this year's increased interest in non-U.S. products is that investors may be looking to diversify away from U.S. investments, said Mark Kopinski, senior vice president and co-portfolio manager of the American Century International Growth Fund. Because of the successful run of the U.S. equity market in recent years, investors may have found themselves overweighted in domestic equity assets.
Amy Hoivik, consultant at Frank Russell Co., Tacoma, Wash., said diversification is one of the reasons institutions steadily have increased allocations to non-U.S. investments. According to Russell research, between 1988 and 1999, the percentage of non-U.S. equity in an institutional portfolio has climbed from 6.8% to 18.6%, said Ms. Hoivik. And because U.S. equity markets have done so well in recent years, many institutions have continued to diversify internationally to avoid overexposure when markets decline.
Also, investors are finding that international markets include some unique investment opportunities, such as cellular telecommunications, said American Century's Mr. Kopinski.
"There are trends that you can't necessarily get exposure to here in the U.S. that people are starting to become more aware of," he said, citing two technological developments that are farther along overseas than in the United States: web access protocol, which provides access to the Internet via cellular phone; and electronic payment of goods and services through cell phones.