How to Stay in the Spotlight
As Morningstar's international-fund editor, I'm heartened by the performance of foreign-stock funds this year. It's much easier to make the case for international investing when you can point to current evidence--the typical foreign-stock fund has beaten the S&P 500 over the past 12 months--instead of having to rely on yellowed clippings from the past.
This revival has helped foreign funds regain the attention of investors and the media. But foreign funds shouldn't rest on their laurels. This is the time for them to solidify their position in the marketplace. They can't guarantee permanent rallies in foreign markets. But they can do something nearly as helpful: cut expenses. The average expense ratio for the foreign-stock category is about 1.7%. That's higher than the averages in any of Morningstar's domestic style-box categories, including the small-cap groups.
The fund companies will tell you it's more expensive to research foreign stocks and (for some firms) to maintain a network of offices abroad. That's true. Research costs are higher because most foreign companies don't provide financial data as regularly or as clearly as U.S. companies, and it costs more to travel to Tokyo than to Topeka.
Still, the costs of research and travel have declined in recent years. Many large foreign companies--the ones favored by most funds--provide financial data nearly as complete as U.S. company reports. And reasonable airfares are available for managers who care to look for them. While foreign-fund expense ratios might always be higher than those of most U.S. funds, foreign funds can't keep charging so much if they expect to retain their popularity after the rallies fade.
Several good foreign funds, such as TIAA-CREF International Equity TIINX, T. Rowe Price International Stock PRITX, and Hotchkis & Wiley International HWINX, have expense ratios below 1%. If foreign funds at least head in that direction, the better their chances of holding on to the spotlight that's fallen on them in 1999.
The Jacob Chronicles
Ryan Jacob, the former Internet Fund WWWFX manager who's planning to bring out his own offering, is learning the price of celebrity. He's been getting a lot of grief lately--a surprising amount, considering the triple-digit returns he has racked up.
First, he and his former colleagues engaged in a public tussle over which of them deserves the credit for Internet Fund's astounding record. Then, an impatient investor griped on Morningstar.com's conversation boards that Jacob is costing him money by taking so long to get the new fund going. And last week, The Wall Street Journal ran a story noting that Jacob's uncle, Leonard Jacob, will serve as a director for his new Jacob Internet Fund--and that the SEC will allow the uncle to be classified as an independent director.
It would be easy to razz Jacob for choosing his own uncle. But putting Uncle Len on the board isn't really problematic. Many fund directors--and directors of regular companies--have connections with the executives they're supposed to be supervising. Having your uncle on the board isn't much different from having your old b-school buddy or golf partner on there.
What is a problem is the SEC's decision to call Jacob's uncle independent. If push comes to shove, it's got to be harder to criticize or fire your own flesh and blood--particularly a younger family member who's trying to establish a foothold in a very competitive business. So I disagree with the SEC. Let Jacob the Elder stay on the board. But call him an inside director--not an independent one.
Fun with Numbers
The other day, the Financial Times informed me that the name of China's leading e-commerce firm, 8848.net, "reflects the height in meters of Mount Everest." That led me to think that maybe fund companies should use this trick when naming their own creations. Sure, some funds, like those from 59 Wall Street, include a boring old street address in their names, but so much more could be done. Here are some suggestions:
|The $1.75 Million Fund: Reflects the salary of the portfolio manager.|
|The 6- to 8-Month Fund: Reflects the manager's likely tenure. Particularly suitable for Fidelity Select funds.|
|The 12 Fund: Reflects the number of sentences in the prospectus that can be understood by the average college graduate.|
|The 30,000 Fund: Reflects the number of times the manager will say, "We're not trying to hit home runs here."|
Stat du jour
27.6%: The foreign-stock category's average 12-month return through October 31, 1999.
25.6%: The S&P 500's return over the same period.