Foreign Funds Trail While Energy Soars

06/09/2008 12:00 am EST

Focus: MARKETS

Janet Brown

Editor, NoLoad Fund*X

Janet Brown, editor of NoLoad Fund*X, says high-flying international mutual funds have begun to lag domestic US equity funds, as energy funds continue to set the pace.

Last month, US markets continued to outperform for­eign markets as measured by the MSCI Europe Asia and Far East (EAFE) index. Latin American funds were strongest, up nearly 10%, while diversified emerging markets funds, Europe and Japan funds all gained over 2% for the month. China, India, and much of Asia sold off.

We’ve been in a five-year market trend that favored international funds over domestic funds, but this year domestic funds took the lead. Internationals no longer dominate the top ranks [of NoLoad Fund*X’s list]. The only foreign funds [among our leaders] are Harbor International and Fidelity Worldwide. Many diversified domestic funds are now rising up the ranks, as are small caps and growth funds.

The weak US dollar provided a boost to international funds for the past six years. Now, after losing nearly half of its value against major foreign currencies, the US dollar decline has lost its downside momentum.

As the US dollar trended lower, it made domestic companies more com­petitive overseas. Larger internation­ally oriented companies profited from a falling greenback. While a weak dollar is assumed to favor big stocks over small, there are many other influ­ences and no direct correlation to rela­tive performance. For instance, the dollar fell from 2002, yet large caps did not start to outperform small caps until 2006. Nevertheless, since March of this year, when the dollar seems to have bot­tomed, the relative advantage of big stocks may be in question.

The Federal Reserve is not likely to raise rates until it is confident that the credit crisis is a thing of the past, but it has signaled a concern for the weak dollar causing inflation. Fed chairman Ben Bernanke has indicated that interest rates cuts are likely over. Higher inter­est rates would make it more attractive to hold dollars.

Domestically, natural resource funds led by wide margins last month and are the only sector with outsized gains this year, as well as the last few years. The price of oil has doubled since May 2007, because worldwide oil production is static at best, while global demand is growing.

In most markets, surging prices would promote increased supply and decreased demand, and result in eas­ing prices. But the natural resources markets are more fixed. It takes years to find new resources and there are no ready substitutes. Some govern­ments keep the price of fuel artificially low and have recently begun to allow prices to rise.

It’s estimated that global demand would drop significantly if all fuel was market priced. This, along with high prices pinching off demand could help ease the current shortfall in global supplies, but longer term we don’t see energy demand going any­where but up.

Growth funds were far stronger than value funds [in May], and technology funds are rapidly rising up the ranks. Certain value-oriented sectors of the US equity market have been hit hard by ongoing problems in the credit markets and the slowdown in household consump­tion. Financials remain battered.

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