Emerging markets: risky road to riches

Mutual Funds

July 18, 1999|By Jerry Morgan | Jerry Morgan,NEWSDAY

Emerging-market funds, a year ago considered submerging funds, have surfaced again with a vengeance, up 33 percent since the first of the year.

"There seems to be a lot of manic-depression investing in emerging markets," said Rajeev Bhaman, manager of Oppenheimer's Developing Markets Fund. "People get overly excited and invest, then get overly depressed and there are enormous swings in the market. The markets are very volatile because of people's perceptions."

Those perceptions are based on reality. Consider the past two years: the Asian financial collapse, the Russian devaluation of the ruble and default on debt, the Brazilian financial soap opera and last fall's Long-Term Capital Management debacle.

All of that led to very depressed markets, and, eventually, to recoveries with some spectacular year-to-date gains. Those gains need to be taken with a grain of history because when an investor got in really matters.

Emerging-market funds are up 33 percent since January but up only 13 percent for the past 12 months. Latin American funds, up 25 percent for the year to date, are still down 5.4 percent in the past 12 months. Pacific region funds are up 35 percent to 42 percent for the year to date but for the 12-month period are up 42 percent to 60 percent. Their recovery started a lot earlier.

Here are two extreme but not uncommon examples that show how strong a stomach one needs to be in these markets. Both funds are up this year, but if you were an initial investor in either and haven't sold, you are losing money.

The Lexington Troika Russia Fund was up 97 percent at the end of June, which is spectacular, but if you owned the fund for a full year, you lost 26 percent. Mathews International Korea Fund is up 239 percent in the past 12 months and about 80 percent this year. But the Korea fund was at $2 a share on June 30, after being at $6.52 a year earlier. It was at $7.30 June 24, galloping back from that $2 price. Quite a ride.

Russia's economy is based on oil prices, higher now as Asia recovers but depressed during the Asian crisis, said Lexington Managing Director Lawrence Kantor. When the fund started, he said, "we envisioned volatility, but we didn't expect to see it move up so quickly, and, again, we didn't expect the devaluation of the ruble and the default on debt." The Troika fund was at $24.21 a share on Sept. 30, 1997. One year later, it was at $2.83, down almost 90 percent. On June 24, it was at $5.21 a share, but how many investors jumped or were thrown off?

None of that is unusual with emerging-market funds. Paul Mathews, who manages the Korea fund, said Korea attributed the turnaround to the country's restructured economy, the floating of its currency, the opening to foreign investment and making companies more transparent to outside investors. But he cautioned, "We would never expect it to be a straight line up from here."

Korea and Troika are single-country funds, which are the most volatile of the emerging-market funds. But general emerging-market funds have had similar problems. The category, up 33 percent this year, is up only 16.55 percent for the past 12 months and is down 6.8 percent over the past five years.

Daniel Beneat, who manages Dreyfus' Premier Emerging Markets Fund, which is up almost 50 percent since January but only 12.5 percent for the past 12 months, argued that "if you take out last August when Long-Term Capital collapsed, the performance would be a lot better. A lot of hedge funds were very leveraged, and when they had to raise money, they dumped their stocks."

"We were down 20 to 25 percent that month." Now, Beneat said, he is investing more heavily in Asia than emerging-market indexes, is neutral on Latin America and considers Russia too unstable.

Oppenheimer's Bhaman is less enthusiastic about about Russia. "Russia doesn't interest me because it might as well be run by the Mafia," he said. "It is a very scary place."

Still, most fund managers and analysts see emerging markets as a good place for investing now for the same reasons Mathews used for Korea. But with caution. Most suggested putting only 5 percent to 10 percent of assets into emerging markets.

Some, including David Herro, director of Oakmark's international investing, and Paul Quinsee, managing director of international equities at J. P. Morgan, suggest buying broad-based international funds that include emerging-market exposure as part of the portfolio.

Pub Date: 7/18/99

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