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Small cap foreign funds up
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July 9, 1999: 10:44 a.m. ET
Rally in small companies isn't limited to U.S. markets, fund experts say
By Staff Writer Martine Costello
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NEW YORK (CNNfn) - If you think U.S. small cap stocks have turned around after a long drought, fund manager Leah Zell says you should see the renaissance in small international companies.
She started buying Venture Manufacturing in Singapore a year ago at 3-1/4 when panicked investors were practically stampeding out the door. Today, the stock is trading around 15, and her stake is worth about $50 million.
And the $8 million Zell spent on WM Data Nordic in Sweden back in 1993 would be worth $160 million today if she hadn't started selling the stock to hunt for other undiscovered values.
"We enjoy buying small companies that are not well-known or understood," said Zell, manager of the Acorn International Fund. "What excites us is buying small companies that have the ability and potential to become great businesses."
Why small cap foreign funds are shining
The Acorn fund, with $1.73 billion in assets, is one of the oldest among small cap foreign stock funds whose numbers -- and performance -- have been rising lately.
The number of small cap foreign funds has jumped from about a dozen in 1995 to about 33 this year, said Kunal Kapoor, an analyst at fund-researcher Morningstar.
Their performance in 1999 has risen even faster. The Lipper international small cap funds index is up 17.8 percent year to date as of June 30, Zell said.
Zell's fund is up 19.52 percent year to date as of Wednesday, according to Morningstar, putting it almost 7 percentage points ahead of the S&P 500.
A major reason for the turnaround in the category is "the mother of all rallies" in Japan small companies, Zell said. The Japan small cap index is up 150 percent since October, she said.
For example, the Warburg Pincus Small Companies Fund, though small with $20 million in assets, is up 113.02 percent year to date as of Wednesday, making it number one among all international stock funds, according to Morningstar.
"Japan funds are on fire," Kapoor said.
Zell used to have only a tiny weighting in Japan companies, but now it represents 10 percent of the portfolio.
"At the end of last year, we couldn't find stocks to buy in Japan," Zell said. "Now we're seeing a lot of changes in management and other areas that we've been waiting for. This is a major change for us. I've been a big bear in Japan and now I'm turning."
And as international markets started to recover, small cap foreign stocks went along for the ride, Zell said.
"Foreign markets have been through a major shakeup in the last three years," Zell said. "You can really see the economies begin to turn around."
Another reason for the new interest is investors are getting more savvy. Instead of being satisfied with a general "international" category, they want diversification -- small cap foreign funds, large cap foreign funds, and so on.
"It's the beginning of the segmentation of the international arena," Zell said.
What should investors do?
Still, Kapoor said investors should be wary about getting into a small cap foreign stock fund. The field is so new that many funds may be untested, he said.
The trick is finding a fund with a proven management team, Kapoor said. He recommends Acorn International Fund, American Funds' Smallcap World Fund, up 19.16 percent year to date as of last Friday, or Oakmark International Small Cap Fund, up 49.07 percent year to date as of Wednesday. A good research staff is crucial to success in tricky overseas markets.
"A lot of style purists want to have small cap foreign funds," Kapoor said. "But (the category) still in its infancy. I'm still not completely sure you need one in your portfolio. This is something that is relatively new. You have to be very careful when you choose a fund."
At Acorn, Zell has a team of eight who visit about 1,000 companies a year. Zell this year has visited London, Hong Kong, Japan, Sweden, Germany and Switzerland.
"We all have a lot of frequent flier miles," she joked.
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