Further to our ideas of investing in Asia.
Some more ideas.
(C)
The New York Times
"Sure, the Asian markets took a kamikaze dive last quarter: the Morgan Stanley Emerging Markets Asia Index was down 33 percent, and fund managers suffered mightily.
Who Has Been Buying in Asia?
These three funds have been adding Asian stocks to their portfolios while others have bailed out.
Fund 2MoReturn* Percentage of Assets in Asia
Oakmark International Small-Cap -13% 30%
Pictet Global Emerging Markets -23% 35.8%**
Putnam Asia Pacific Growth A shares-16.3% 85.0%
Sources: Morningstar Inc.; company reports
*As of Feb. 20 **Excludes India
"It was one of the worst free falls I've seen: The stock markets and the currencies collapsed at the same time," said Ken Gregory, publisher of the No-Load Fund Analyst in San Francisco.
Amid all the tumult, a clutch of money managers were looking for opportunity. Some are suffering for their aggressiveness -- providing a lesson in how going against the herd can leave a portfolio trampled.
But with stocks in Malaysia, South Korea and Thailand all recovering strongly these less-liquid markets can quickly become difficult to invest in. And so the early bargain hunters may be positioned to reap the benefits of their buying, even if they are lagging behind in the current market rebound.
David G. Herro of Harris Associates in Chicago is one of them. He and Michael Welsh, his co-manager, had 30 percent of their Oakmark International Small-Cap fund, in which they did most of their buying, invested in Asia on Sept. 30.
They bought enough stocks to maintain that percentage by the end of the fourth quarter. (The larger and better known Oakmark International fund invested only modestly in Asia because it was tougher to find bargains among larger-capitalization stocks.)
The two managers devised a strategy best described as divide and conquer. They each traveled to different countries in Asia in the fourth quarter, looking for the same kind of underpriced companies as they always had. Around them, chaos: markets and currencies kept tumbling as investors fled.
"For a time there in the fourth quarter, we were basically given these companies," Welsh said. "From our perspective, it was just a fire sale."
At first, sticking to their bargain-hunting strategy was easy. Herro and Welsh simply added to their positions in stocks they already owned, mostly in small-cap companies. The Daimon Co., a Japanese retailer, is an example; in the fourth quarter it was trading at a steep discount to its book value.
At its all-time high, Daimon stock traded at 6,000 yen. When Daimon dipped to 500 in November, Herro and Welsh started buying. "There were a lot of people trying to sell," Welsh explained. "The market priced the underlying business at almost nothing."
Still, he said, his heart sank as the price continued to drop, to a low of 240 yen on Dec. 25. This year, it has rebounded to 380 yen, "a nice bounce back," he said. In fact, Welsh said, the fund has broken even or made money on almost all the stocks it bought since Sept. 30.
Another company that was "absolutely ravaged," he said, was Technology Resources, a telecommunications holding company in Malaysia. Again, the fund already owned the stock. By December, when it was trading at 2.3 ringgit to 2.4 ringgit, the managers started buying, but the company kept falling, to a low of 1.9 ringgit. It now trades at 3.82 ringgit.
As the quarter progressed, it became more difficult to find solid companies at reasonable prices. For every nine they examined, Welsh said, only one met their value-conscious criteria. But they kept buying and, for their troubles, were hammered. Oakmark Small-Cap dropped 24 percent in the quarter, Welsh said; it has risen 9 percent so far this year.
This comes close to the 9.9 percent gain this year in the benchmark he tries to beat, the Morgan Stanley Europe, Australasia and Far East index.
There were other buyers, too, including Pictet International Management, based in London, which has a team of money managers who use a data base of 10,000 companies with multiple screens to sort out opportunities. Like his counterparts at Oakmark, Julian Garel-Jones, senior investment manager in charge of the Global Emerging Markets fund, first looked at companies already in his fund and added to those positions.
An example was Delta Electronics of Thailand. Garel-Jones said the company, with no debt, was trading at a fraction of the value of other electronics manufacturers in emerging markets.
Pictet's strategy is to establish a benchmark valuation for every sector to help define the relative value of a company's stock, Garel-Jones said. For example, most electronics manufacturers in the region are valued at the equivalent of $250 or so per unit of production capacity.
But Pictet bought Delta when it was valued at just $60 a unit, he said. Now it is at $240 and closing in on the average, where Pictet would start selling.
In Malaysia, where Pictet held virtually no stocks, Garel-Jones said it began buying shares in UMW Holdings, an auto manufacturer, at the end of December. Pictet figures auto companies should be valued at the equivalent of $3,000 for each car or truck they make.
He bought UMW below that benchmark, at $400 an auto, and it is now at $1,300 an auto. Pictet bought UMW at 3 ringgit and below in December; it fell to a low of 1.35 ringgit on Jan. 14, and has since climbed to 4.80 ringgit.
"It can still double to reach the world average," Garel-Jones said of the benchmark for UMW. Buying heavily in Asia has caused the fund to underperform. The Pictet Global Emerging Markets fund dropped 22.5 percent in the last quarter and was down 1.1 percent in January, but is up 2.4 percent for the year to date.
"We're picking up more in February," Garel-Jones said. "Over the long term, we should have good returns. We have established our position in Asia."
One might think that a fund with a name like Putnam Asia Pacific Growth A would have held huge positions in the collapsing markets. But David K. Thomas and Paul Warren, the senior international portfolio managers who run the fund, said they sought safety in the relatively stable markets of Japan, Australia and New Zealand unless there was an opportunity they couldn't pass up.
There was.
Early in the quarter, they bought shares of Dairy Farm, a food retailer based in Hong Kong, at an average of 86 cents (Singapore) on the Singapore exchange. Shares of the retailer, which was then shedding unprofitable subsidiaries, are now at $1.20 (Singapore).
In Singapore, Thomas and Warren increased their shares in four banks, including the Development Bank of Singapore. They bought at an average price of $11.40 (Singapore) in December. It was up to $12.70 on Friday. Similarly, they bought shares of Dao Heng Bank in Hong Kong at $16 (Hong Kong) in December; it once traded at $48.20; it is now at $22.20.
Over all, the Asia Pacific Growth A fund dropped 15.7 percent in the quarter, and is down 2.4 percent this year, having missed Japan's recent rebound. As a comparison, Thomas points to colleagues in the Putnam International Growth fund, who were buying in some markets in Asia last quarter, but also in Europe.
That fund dropped only 5.4 percent in the quarter and is now up 7.1 percent so far in 1998. "You would have had to make a massive switch in strategy to benefit" from the downturn in the emerging markets, Thomas said. "That's not our style."
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