Emerging markets, receding doubts

INVESTING

Fund managers talking Asia again, Greece, even Russia and Brazil

February 28, 1999|By Bill Atkinson

Christopher Alderson knows first-hand how dicey it can be to manage a mutual fund that invests in developing countries.

In the early 1990s, he was driven out of Malaysia at gunpoint by armed guards after asking "a lot of detailed questions of the Malaysian authorities." One guard even put a gun to Alderson's head.

"I got accused of being a spy," said Alderson, who manages the T. Rowe Price Emerging Market Stock Fund.

Being pushed around by gun-toting heavies may be a hair-raising experience, but it almost pales in comparison with the plunging currency markets and cratering economies that have rocked the sector. Indeed, the past two years have been disasters for "emerging market" mutual funds, and they are off to another bad start this year.

These funds, which invest in companies in such countries as China, Brazil, Greece and Russia, fell 2.15 percent on average in January, according to Wiesenberger, a Rockville-based mutual fund tracking service.

Last year, only two emerging market funds had positive returns: MFR Emerging Markets Total Return Fund, which gained 10.21 percent, and Oakmark International Small Cap Fund, up 9.2 percent.

The average return for 177 emerging market funds was a negative 26.09 percent, according to Wiesenberger.

Not surprisingly, the amount of money flowing into emerging market funds is down to a trickle. Net inflows of cash into 111 funds tracked by the Investment Company Institute, the Washington-based mutual fund trade group, was just $90.7 million last year, down from $3.8 billion in 1997.

"Everything has been trashed," said Alderson, whose fund, with about $72 million under management, returned a negative 28.75 percent last year.

That's why he and others in the business say it's time for investors to dip into emerging markets. "It is difficult to see what else can go wrong," Alderson said. "If you were to buy now, and you have a medium-term view [two years], you are going to make very good money," he said.

Others are even more optimistic that the worst is over.

"I think the market will be one of the top performing fund categories this year," said Bruce Jensen, chief investment officer at New York-based MFR Emerging Markets Total Return, which has $1.5 million in assets under management.

"I think you will start to see a lot of flow back into emerging markets."

It certainly will take a leap of faith for an investor to dump money into emerging markets. The funds, as a group, have been losers over three and five years, returning a negative 7.48 percent and a negative 8.41 percent respectively. Over 10 years, the group returned a modest 2.37 percent, according to Wiesenberger.

For their part, Alderson and Jensen are enthusiastic about emerging markets because there are signs that the economies of South Korea, Singapore and Taiwan are rebounding. And that Japan, the world's second-largest economy, is cleaning up its troubled banking industry and reforming financial laws.

While these countries are improving, others, including Greece and Portugal, are flourishing, they said.

MFR's strong performance last year was due to picking good markets and staying out of the bad ones. It popped much of its money into companies in Greece, where the hot economy has been fueled by falling interest rates. The fund invested in companies that include Hellenic Telecommunications Organization, which develops and installs telecommunications equipment; and Titan Cement Co., a large cement and building products company.

It stayed out of Russia, where markets collapsed last year when the government defaulted on billions in debt, and Asia, which whipped markets in 1997 and 1998 as economies in Indonesia, Malaysia and Thailand crumbled.

"We missed all of the disasters last year," said Jensen, who has worked at various mutual fund companies for more than 20 years.

Alderson wishes he could say the same thing, but nearly 12 percent of the fund's total assets was invested in Brazil, which was hit by rising interest rates and inflation.

Alderson also likes companies in Greece and Hungary. One of his favorites is Matav Rt, a Hungarian telecommunications company run by a former IBM executive. Matav has a monopoly in fixed-line telephony, and it has about a 60 percent share of the country's rapidly growing mobile phone market.

To Alderson, Russia still appears shaky, but several companies are promising, including Moscow-based Gazprom, which is the largest natural gas company in the world, and LUKoil Holding, which has one of the biggest crude oil reserves in the world, he said.

Alderson expects that it will take Brazil's badly weakened economy another 12 months to recover. But it should show results faster than Asian economies because corporations didn't borrow heavily to expand, and the banking system is still strong.

"The last shoe has dropped in our view," he said.

If Brazil's economy improves this year, more money should begin to flow back into emerging market funds, Jensen said.

In October, shortly after the financial markets were rocked by Russia's debacle and the near failure of a large hedge fund, Jensen put a "good chunk" of his retirement into emerging markets.

"I'm up 10 or 12 percent," he said. "I don't see any other disasters."

Pub Date: 2/28/99

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