Despite some unsettling jolts in world markets this year, American savers seem as intent as ever on diversifying their investments beyond the borders of the United States.
Global and international mutual funds keep enjoying explosive growth, while the expansion of the overall fund industry has slowed from the frantic pace of the early 1990s.Marketers of financial products are offering more and more diverse ways to invest overseas.
The Investment Company Institute reports that assets of global and international stock mutual funds reached $152 billion at the end of July, more than double the $68.7 billion total of a year earlier.
Even in the face of a sharp rise in interest rates that depressed bond prices in many markets around the world, assets of global bond funds climbed to $36.52 billion July 31 from $32.55 billion 12 months before.
Although mutual funds may be the most logical way for most small investors to pursue an international strategy, more direct avenues are available in increasing numbers.
The supply of American depositary receipts traded in this country representing foreign stocks is increasing all the time. On the bond side, meanwhile, firms like Canada's Friedberg Mercantile Group are expanding efforts to market foreign bonds to U.S. investors.
Among families and individuals that invest in mutual funds, 26 percent now own shares of global or international funds, according to a Gallup study of 1,000 households sponsored by the mutual fund firm of Scudder, Stevens & Clark Inc.
Half of the respondents with world funds said they planned to increase their commitment outside the United States within the next year.
As more and more investors venture abroad with their money, financial advisers say, they must be aware of the special hazards of foreign investments as well as the potential rewards to be gained.
"You may need to develop a greater tolerance for volatility," cautions Kemper Financial Services Inc. of Chicago in a current advisory to investors in Kemper's fund family. "The volatility of international markets has tended to exceed that of domestic markets."
Then there is the problem of currency fluctuations, which can greatly enhance - or wreck - the performance of a security denominated in yen or francs or pounds when the results are translated into U.S. dollars.
Some investment approaches incorporate hedges against currency fluctuations, while others minimize or eliminate such protections as too expensive.
"Not all markets are as advanced as you might expect," Kemper adds in a caveat directed especially at the popular "emerging markets" in developing countries and nations where capitalism is just beginning to replace other economic systems.
In some cases, Kemper says, "the actions of a handful of buyers and sellers can undermine an entire market."There are many other risks associated with emerging markets that are greater than for more developed markets, such as rapid inflation, unstable economies or political systems, market illiquidity and lack of market regulations."
Foreign investing also tends to complicate your tax affairs. Dividends paid by an overseas company, for instance, are taxed by the company's home country.
You can subsequently take a U.S. tax credit for foreign taxes paid, if you are willing to work your way through the Internal Revenue Service's Form 1116. Otherwise, you can claim foreign taxes as an itemized deduction.
Why brave all these hazards and problems? Operating internationally provides an extra way to diversify your investment holdings.
But probably the biggest incentive is a widespread belief, correct or not, that foreign investments may offer greater opportunities today than the rewards available in U.S. investments.
As Scudder says, "International-global stock funds are perceived as riskier than similar U.S. stock funds, but the potential reward may outweigh the risk."
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Additional Information
Rates at a glance
Savings Yields
6-mo. CDs 3.80%
1-yr CDs 4.40%
18-mo. CDs 4.51%
2 yr. CDs 4.79%
30-mo. CDs 5.03%
3 1/2-yr CDs 5.25%
Money market acct. 2.62%
Money market funds 3.99%
Mortgages & Loans
30-yr. fixed mort. 8.59%
15-yr. fix ed mort. 8.13%
Adjustable mort. 5.65%
FHA-insured mort. 8.92%
Home improv. loans 9.01%
Installment loans 14.29%
48-mo. auto loans 8.04%
RV/marine loans 10.56%
finance Rates
Fed. funds 4.72%
Prime rate 7.75%
Discount rate 4.00%
90-day T-bill 4.64%
6-mo. T-bill 5.02%
1-yr. T-bill 5.50%
2-yr. T-note 6.11%
30-yr. T-bond 7.49%
Source: Bloomberg Financial and 1994, the Meyers Report Chicago