Risks and benefits of international mutual funds

Boroson’s Keys To Investing in Mutual Funds explains everything necessary to understand all the benefits and risks. First of all, the study clarifies and assets the specific types of international mutual funds: “Fund Survey suggests that you consider four types: 1. Multi-country, multi-region funds, which invest mainly in large-company stocks anywhere outside the United States; 2. Single-country, single region funds, which are much riskier; 3. Small-cap funds; and 4. Emerging-markets funds. ” Avoiding risks and planning greater benefits, the manager should take into account the global investment practices:

“Some moderate investors might not want to own any foreign single-country, single-region mutual funds. In any case, many multi-country funds have a sizable exposure to emerging markets. In general, there’s agreement that a person needs a ten-year time horizon to invest safely in emerging market funds. ” Sound management practices of collective investments through effective regulation and a commitment from the asset management industry to investor protection should be developed. Liquidity in Emerging Markets Emerging markets offering greater returns is an extremely attractive option for investors.

Jeffrey C. Hooke in the Emerging Markets: A Practical Guide for Corporations, Lenders, and Investors analyses the following dynamics: “In just five years, Wall Street originated over 400 emerging market mutual funds to attract U. S. and European monies, collecting billions of dollars in the process. Encouraging this movement were…government deregulation. Seeking foreign capital, governments eased foreign investment restrictions…Other obstacles to foreign investment, such as price controls, foreign exchange regulations, and legal barriers were loosened.

Foreigners were invited into new areas such as cable-TV and wireless communication… ” Instability as well as continuous economic crises in emerging-market economies were a prominent feature of the global financial environment during the second half of the 1990s. But the measures taken after Asian financial crisis were aimed at improving financial stability in emerging-market economies and reducing the frequency and intensity of future crises. Today the situation might be reversed.

Ito’s International Capital Markets: Developments, Prospects, and Key Policy Issues states that “emerging markets (Hungary and Mexico)… are evolving to reduce the risks of a systemic liquidity crisis. ” Analysts believe that prudent debt and liquidity management is a key element of crisis prevention. The IMF also has recently moved to make the pricing of its Contingent Credit Lines more attractive to potential borrowers. The Contingent Credit Lines provides liquidity to the countries with track records of sound policies.

The IMF has also moved to improve its ability to evaluate the economic and financial vulnerabilities of its members, including efforts to identify national balance sheet and liquidity risks, as part of a broader initiative to enhance the IMF’s observation attempts. When the government’s fiscal position is unsustainable, international financial assistance aimed at providing temporary liquidity will not content. Yale researchers William N Goetzmann, Zoran Ivkovich and K. Geert Rouwenhorst in the paper entitled Day Trading International Mutual Funds: Evidence And Policy Solutions state the following:

“Daily pricing of mutual funds provides liquidity to investors but is subject to valuation errors due to the inability to observe synchronous, fair security prices at the end of the trading day. This may hurt fund investors if speculators strategically seek to exploit mispricing or if the net flow of money into funds is correlated with these pricing errors…mutual funds are exposed to speculative traders by using a simple day trading rule that yields large profits in a sample of 391 U. S. -based open-end international mutual funds.

” The researchers propose a simple “fair pricing” mechanism that alleviates the abovementioned concerns by correcting net asset values for stale prices and argue that fund companies and regulators should look at alternatives that allow funds to offer fair pricing to investors, which in turn decreases the need to resort to monitoring for day traders and redemption penalties. We should keep in mind that sometimes mutual funds have crucial importance for the sustainability and development of emerging markets.

On the example of India, Sima Motamen-Samadian,Celso Garrido in the Emerging Markets, Past and Present Experiences, and Future Prospects shows this trend: “The Reserve Bank of India therefore advised the the mobilisation of household savings through capital market expansion for meeting the corporate sector’s requirements. This led to several fiscal incentives which helped to increase greatly the number of investors on the stock market, mainly through the growth of mutual funds. ”

Train in his books The Craft of Investing: Growth and Value Stocks, Emerging Markets, Market Timing, Mutual Funds, Alternative Investments, Retirement and Estate Planning advices to chose the following strategy applicable for the emerging markets: “For instance, an emerging-market fund that changes its focus as countries emerge into the limelight and then retreat can be a good idea. ” So we can conclude that emerging markets offer greater benefits but also suppose higher risks.

Policies for Improving International Investment Management International mutual funds can bring great benefits, but the financial specialists worldwide recognize that professional investment management is the key to success. Most mutual funds’ investment portfolios are continually adjusted under the supervision of a skilled and professional manager, who forecasts the future performance of investments appropriate for the fund and chooses the ones which is believed to match closely the fund’s stated investment objective.

One of important practical advices found in Train’s The Craft of Investing is having one reliable local source of information in a foreign country. Using computers and online for information and analysis is a widespread practice, but managers should base on alternative sources, too. The tools that are usually applied to home or foreign investment can work in the cases of international mutual funds, too. One of the examples is offshore registration. Cornez in his Offshore Money Book: How to Move Assets Offshore for Privacy, Protection, and Tax Advantage recommends the following:

“International mutual funds may be registered offshore to minimize regulation and boost investor returns. Some of the more popular countries for mutual fund registrations, and their percentage of the market (as of late 1997), are Luxembourg (63 %), Switzerland (10%), Ireland (6%), Netherlands Antilles (5%), Cayman Islands (4%)…” Tax considerations gain specific significance while investing in international mutual funds.

The Vanguard Group recommends investing in international mutual funds to those with a long-term investment horizon seeking to further diversify a portfolio of U.S. securities and long-term growth of capital, without significant dividend income, and to those willing to accept significant fluctuations in share price and the additional risks associated with international investing.

Conclusion To sum up, I would like to state once more that investment companies and investors seek opportunities in the global marketplace, and international mutual funds is a great option for those, who is able to assess risks and to make long-term prognosis.

Sources: 1. Peter W. Madlem, Peter W. Madlem, E. B. Winton. 1999.

The International Encyclopedia of Mutual Funds, Closed-End Funds and Real Estate Investment Trusts. AMACOM. 2. CNN Money Accessed: 12 june 2004 3. John Train. 1995. The Craft of Investing: Growth and Value Stocks, Emerging Markets, Market Timing, Mutual Funds, Alternative Investments, Retirement and Estate Planning.

HarperBusiness. 4. Jon Woronoff. 1993. Global Investing With Mutual Funds. Intl Pub Corp. 5. Takatoshi Ito. 1998. International Capital Markets: Developments, Prospects, and Key Policy Issues. International Monetary Fund. 6. Albert J. Fredman, Russ Wiles, A.

Michael Lipper. 1997. How Mutual Funds Work. Prentice Hall Press. 7. Warren Boroson. 1997. Keys to Investing in Mutual Funds. Barron’s Educational Series. 8. William N Goetzmann, Zoran Ivkovich, K. Geert Rouwenhorst. 2000. Day Trading International Mutual Funds: Evidence And Policy Solutions. AFA 2001 New Orleans; Yale SOM Working Paper No. ICF – 00-03. http://ssrn. com/abstract=217168 Accessed: 12 June 2004 9.

Arnold L. Cornez. 2000. Offshore Money Book: How to Move Assets Offshore for Privacy, Protection, and Tax Advantage. McGraw-Hill Companies. 10. The Vanguard Group http://flagship3.vanguard. com/ Accessed: 12 June 2004 11. Jeffrey C. Hooke. 2001. Emerging Markets: A Practical Guide for Corporations, Lenders, and Investors. Wiley.

12. Jean Tirole. 2002. Financial Crises, Liquidity, and the International Monetary System. Princeton University Press. 13. Gregory Arthur Baer, Gary Gensler. 2002. The Great Mutual Fund Trap: An Investment Recovery Plan. Broadway Books. 14. www. firstrade. com http://www. firstrade. com/ Accessed: 12 June 2004 15. Sima Motamen-Samadian,Celso Garrido. 2000. Emerging Markets, Past and Present Experiences, and Future Prospects. St. Martin’s Press.