Newspaper article THE JOURNAL RECORD

Foreign Investment Harms U.S. Small-Company Stocks

Newspaper article THE JOURNAL RECORD

Foreign Investment Harms U.S. Small-Company Stocks

Article excerpt

NEW YORK -- Still smarting because your small-company stocks keep lagging the market? If it's any help, you can lay some blame on overseas investors, analysts and money managers say.

Foreign buyers poured $66 billion into U.S. stocks in 1997, more than the previous five years combined, according to the Treasury Department. This year, they invested $12.8 billion in March alone, more than in all of 1996.

This flow of money has given an added boost to the U.S. market, but unfortunately for people investing in small companies, it hasn't been beneficial for the whole market.

Foreign buyers prefer large, well-known U.S. stocks such as Microsoft and General Electric, money managers say, and are largely responsible for the outsized gains enjoyed by large stocks relative to issues with smaller capitalizations.

The Standard & Poor's 500 Index, dominated by large stocks, is up 22 percent in 1998, while the S&P MidCap 400 Index gained 12 percent, and the S&P SmallCap 600 Index rose 6 percent.

"Overseas investors are flocking to the U.S. market and putting their money in big caps," said David Klassen, manager of the $623 million Chase Vista Small Cap Equity Fund, which has returned 13 percent this year.

The lag in small stocks frustrates portfolio managers such as Michael Berry, a Heartland Advisors money manager who has $125 million invested in companies with market values from $750 million to $5 billion. His Heartland Mid Cap Value Fund has returned 10 percent this year.

Smaller stocks could start performing better than larger issues again if overseas investors pare back their buying of U.S. shares, Berry said. Problem is, it might take a steep drop to sour them on U.S. equities, and that decline would take small stocks with it.

Small-cap investors might then only take solace in the fact that their shares are falling less than bigger stocks or making minimal gains in a stalled market.

The average annual return for large-capitalization stocks in times of accelerating foreign buying is 30.2 percent, according to Christine Callies, an investment strategist at Credit Suisse First Boston who has looked into the effects of overseas buying. When foreign buying is contracting, those returns drop to 4. …

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