Two investments to buy the world

by Douglas Goold
The Globe and Mail
Reprinted without permission

YOU want to be a global investor who earns handsome returns, but you don't know if this ambitious goal is attainable. You know that you face some pretty serious obstacles.

First, you are investing inside your RRSP and must deal with the 20-per-cent foreign content rule. Second, you're a born cheapskate, and don't fancy paying some young hotshot in red suspenders - the very sort of guy Jean Chretien trashed in New York this week - fat fees. Third, you don't have time to choose countries, sectors and stocks. Your deep, dark secret, of course, is that if you did have the time, you would make a mess of it.

And who can blame you for that? Just look at the erratic global returns Morgan Stanley Capital International (MSCI) reported for February. Malaysia had the best-performing market, with a phenomenal 46.1-per-cent gain, but it is still down 59.2 per cent in the past year. Indonesia appeared healthy with an 11.9-per-cent gain, but the country could be on the verge of collapse. And even if you could pick countries, it's tough to pick stocks or sectors. Who could have predicted that the best performing of the Toronto Stock Exchange's 14 subindexes so far in 1998 would be forest products?

There is a solution: Buy international index funds such as those offered by TD Green Line, CIBC and Canada Trust. They let you buy large chunks of the world's markets in one fell swoop for low management fees. You know you will get the performance of whatever index you are buying, something that relatively few high-priced stock pickers achieve. But the clincher is that because the funds hold Canadian money market investments while gaining exposure to the foreign indexes through futures contracts, the funds do not count as foreign content.

Take Green Line's new U.S. RSP index fund, units of which I have just purchased. The fund's management expense ratio was reduced to a scant 0.66 per cent from 0.80 per cent, compared with the average U.S. equity fund MER of 2.2 per cent. The fund aims to achieve the return of the Standard & Poor's 500 total return index (in Canadian dollars), which gives investors exposure to the leading U.S. companies, including many (such as Microsoft and Intel) that are not part of the much narrower Dow.

While the U.S. market has become choppy after a great February, the most successful prognosticator of this bull market remains confident. "Abby says relax," ran the headline on the cover of the Feb. 23 Barron's, beside a photo of a tranquil Abby Joseph Cohen of Goldman Sachs. "If the stock market has supplanted sex as the preoccupation of the baby boomer generation and its elders, then Ms. Cohen can lay claim to having become the market's Dr. Ruth Westheimer," claimed the breathless profile inside. Ms. Cohen audaciously raised Goldman's recommended equity weighting (to 65 per cent) for the first time in three years immediately after the huge Asia-induced correction late last October.

"The next economic recession is beyond our current forecast horizon, and we expect investors to be ultimately comfortable paying for 1998 and 1999 earnings," she wrote in her latest Portfolio Strategy publication.

As you can see from the chart, that one investment takes care of half the world's capitalization. You can take care of most of the other half through a second, similar investment. Green Line for example, is now offering an international RSP index fund (with an MER of 1.25 per cent) that is designed to mirror MSCI's benchmark EAFE (Europe, Australasia, Far East) index. That index represents the developed world outside the Americas, including Japan (its biggest holding at 26 per cent), Britain (second at 22 per cent), 14 countries on the continent, Hong Kong, Singapore, Malaysia (its single suspect component), Australia and New Zealand. When you buy this index, you are buying companies such as Toyota, Nestle, British Petroleum and Glaxo.

While EAFE has trailed the hot S&P 500 for seven of the past nine years, its day may soon come again. As Morgan Stanley Dean Witter's global guru Barton Biggs argued in a recent paper: U.S. companies have already done the Full Monty, leaving little room for further improvement; the European Monetary Union should increase Europe's growth rate; Japan and the other Asian markets have little place to go but up; and EAFE stocks are cheaper than North American stocks. "My guess is that EAFE outperforms the U.S. and North America over the next five years," Mr. Biggs concluded.

Douglas Goold is Acting Editor of Report on Business.