"Buy when the blood is running in the streets"
Tom: Thanks a lot for symbols of Thai stocks on US exchanges.
This story appears in the November issue of SmartMoney magazine.
James R. Hagy
Yes, the news from the Far East has been shocking, with local stock markets down 30,
40, even 50 percent by mid-September after the Thais devalued their currency. And
yes, emerging markets do have a tendency to blow up every few years -- remember
Mexico in 1994?
Nevertheless, there are powerful reasons to make a diversified emerging-markets fund
-- one that invests not only in Asia, but also in Latin America, Eastern Europe, the
Middle East and Africa -- part of your international portfolio.
Over the long haul -- and make no mistake, you should hold these volatile portfolios for
at least five years -- diversified emerging-markets funds can boost the return from the
foreign component of your holdings. Morningstar reports that these funds have
compounded at about 9 percent a year in the 1990s, more than 1.3 percentage points
better than the average foreign fund. It's no wonder, since emerging-markets economies
are growing much faster than those of Western Europe and Japan.
They're also cheap. Asian markets are selling at an average of just under two times
book value; the same goes for Latin America. In contrast, the multiple on U.S. stocks is
a steep 5.5.
Given these valuations, it may be tempting to target the cheapest markets by buying a
regional mutual fund. But our research shows that over time, diversified
emerging-markets funds have returned as much as regional funds -- about 13 percent
annually since 1992 -- with a lot less volatility. For instance, in the two months following
the devaluation of the Thai baht in early July, the average diversified fund lost 6.32
percent, versus 8.48 percent for the average Asia fund.
Naturally, some diversified emerging-markets funds have done a better job than others
of dodging the disasters and making the most of the good times. To find them, we
screened Morningstar's database for such funds with a track record of at least three
years. We then looked for ones that held up significantly better than their average peer
during both the Mexican and Asian currency crises. We also wanted to make sure our
funds outperformed even when emerging markets were in favor, so we required
above-average performance from March 1995, when Latin America bottomed, to early
July 1997, when the currency crisis in Asian nations began to unfold.
Tough criteria? You bet. Only the following two funds passed: Pioneer Emerging
Markets A. Manager Mark Madden credits his top-down style of analysis for getting
him out of Thailand well before its meltdown began. "I had spent a lot of time in January
over there and saw many of the characteristics I saw in Mexico prior to their
devaluation in 1994," he says. "That's when I realized that market was headed down."
Given his results, the prospect of paying the steep 5.75 percent sales load seems less
daunting. Madden scrutinizes macroeconomic fundamentals, such as interest-rate trends,
inflation and debt levels. Once he becomes comfortable with a market, he'll begin
searching for beaten-down stocks. "My job is to buy stocks that are smashed," he says,
and he won't hesitate to load up. He's done just that in Brazil, Mexico and Israel, which
together account for about half of the fund's assets.
The Israeli stake highlights an edge this fund has over its larger peers; because of its tiny
portfolio ($105 million), it can take meaningful positions in the smallest of emerging
markets. Its 12 percent stake in Israel, which is in the midst of a bull market, is a big
reason why the fund is up a peer-beating 23 percent this year.DOW JONES NEWS
10-16-97
08:04 AM
No further information is available at this time.
Going forward, Madden is most bullish on Latin America, with emphasis on Brazil.
"Here's a market trading at 13.5 times earnings and 0.9 times book value," he says. His
favorite stock: the American Depositary Receipts (aDrs) of Telebras, the federal
telephone holding company of Brazil.
Templeton Developing Markets Trust I. This is another fund with a 5.75 percent load,
but no one's done a better job of investing in emerging markets than manager Mark
Mobius. Over the past five years, his Templeton Developing Markets Trust has
compounded at almost 16 percent per annum, several points ahead of runner-up Govett
Emerging Markets A. This year, he's up 19 percent.
Credit this performance to relentless firsthand research -- Mobius spends about 300
days a year on the road visiting companies -- and a strict value approach. Mobius bases
his investment decisions on stocks' fundamentals. If he can't find bargain-priced
companies with expanding profit margins, he won't buy. "We had no whiff of the
currency crisis," he admits, "but we were out of Thailand because those stocks were
getting overvalued."
Similarly, Mobius credits this approach for his fund's relatively superb performance in
the Mexican peso crisis; during that time, the fund lost only 12.38 percent, about half as
much as the average diversified emerging-markets fund.
Now he's getting back into Thailand, with a focus on the big banks, such as Thai
Farmers Bank and Bangkok Bank. He believes both will survive the financial crisis
and pick up market share from the banks that fail. "People question your rationality
when you go into markets where everybody is getting out," says Mobius. "But the
reason that we've outperformed is that we've gone in when the days were darkest and
blood was running in the streets. That's when you find the best opportunities. |
