Nicholas-Applegate Favors Emerging Mkt
Stks For High Growth
By CAMILLE KLASS
Dow Jones Newswires
SINGAPORE -- Investors looking to diversify their investments should
still consider emerging markets for exposure to high-growth stocks,
according to Eswar Menon, an emerging markets portfolio manager with
Nicholas-Applegate.
While developed markets such as the U.S. and Western Europe are
currently investment favorites as they continue to climb, emerging markets
stocks possess substantially higher growth potential, Menon said.
"If you look at emerging markets in terms of (gross domestic product)
growth, what you'll find is over time they'll grow twice or three times as
fast compared to markets like U.S., Japan or Western Europe," the San
Diego-based Menon said in an interview with Dow Jones Newswires.
"Ideally, if you're an investor, you want to divide your assets up so
different asset classes have low correlation with each other," he said.
"Emerging markets have a low correlation with many other markets."
Nicholas-Applegate is a U.S.-based fund global fund manager, which
manages assets of about $32 billion. It's office in Singapore,
Nicholas-Applegate Capital Management Asia Ltd., took over the
operations of Credit Lyonnais Investment Management-Asia in August last
year.
Nicholas-Applegate's emerging markets portfolio has performed
favorably, Menon said.
The company's Emerging Countries mutual fund was launched on Dec. 3,
1990 and is available in the U.S. While the fund has fallen about 33.3% in
the one-year period ended July 31, it's managed to keep its losses below
those of the benchmark MSCI Emerging Markets Index, which has
tumbled 38.1% in the period, according to Lipper Anlaytical Services.
The year's losses for the fund and the index illustrate the risks inherent in
emerging markets investing.
"Emerging markets tend to be more volatile," Menon said. "For people
used to investing in more developed markets, they present more risk."
For that reason, emerging markets investors should typically be fairly
young with a longer investment horizon than a pensioner, he said.
However, Menon pointed out that because the company's emerging
markets portfolio is well-diversified with investments in about 100
companies in more than 35 countries, specific stock risks are minimized.
Indeed, over the past five years, Emerging Countries has gained 21.65%,
compared to a modest 2.77% increase for the index, according to Lipper.
Among its peers in the developing and emerging markets fund category,
the fund was ranked 49th in the last year by Lipper, but sixth over a
five-year period.
Over the longer term, Menon said, trends such as falling inflation,
improved budget management and the privatization of state-owned assets
will work in favor of emerging markets investments.
Even though many markets are weak, he said, Nicholas-Applegate's
emerging markets portfolio has managed to raise new funds. He attributes
this to institutional clients' recognition of the long-term opportunities in
emerging markets as well as Nicholas-Applegate's strong track record.
The company's total emerging markets portfolio recently secured
commitments for about $260 million in investments. Including half of that
money, which has already been invested, the portfolio now has assets of
about $575 million.
The largest weightings in the Emerging Countries fund are in Latin America
and in what Nicholas-Applegate company describes as "emerging"
Europe.
Emerging Countries has about 14% of its assets invested in Brazil, about
9% in Mexico, 8% each in Argentina and Israel, 7% in Greece and 5%
each in Hungary and Poland, according to Menon. In addition, about 5%
of the fund's assets is invested in each South Africa and India, he said.
The fund's Asian exposure has shrunk dramatically from 65% in early
1996 to about 10% today, he said. In addition to India, where the
company holds software company NIIT, its remaining Asian holdings are
in Taiwan, Hong Kong and Singapore.
The company reduced its holdings in Asia well before the onslaught of the
region's financial problems, according to Menon. Though he and his
colleagues couldn't have predicted the current crisis, Menon said, there
were early signs of trouble brewing, ranging from Thailand's large
current-account deficit to the extensive lending by many banks in the
region to the real estate sector.
Although macroeconomic fundamentals played a part, he said, the
company's bottom-up, company-driven investment philosophy drove the
shift out of Asia. The philosophy involves seeking well-managed, quality
companies with strong balance sheets, low debt-to-equity ratios and a
competitive advantage.
"At the company level, we found better opportunities in other markets like
Latin America and Eastern Europe," he said. "People for a long time had
been fascinated by Asian markets and ignored some of the problems."
To illustrate the values to be found outside Asia, Menon noted that
Malaysian companies with an earnings growth of about 10% on average
traded at a price-earnings multiple of 20 times early last year. In
comparison, companies in South America, with earnings growth of 20% to
25%, were trading at a price-earnings multiple of less than 10 times.
The fund's Asian exposure in the fund isn't likely to be increased over the
next six to 12 months, he said.
The company recently sold its holding in Mexican TV producer Grupo
Televisa because its earnings disappointed and the company "wasn't doing
things it promised," Menon said.
The fund recently added Czech radio station Ceske Radio Communication
because it is a strong business and Nicholas-Applegate expects the Czech
economy will soon start to turn around, Menon said.
Nicholas-Applegate currently favors consumer stocks in Mexico because
consumer spending is increasing, banking stocks in Greece and Israel, and
companies that will benefit from privatization in Brazil, Menon said.
-By Camille Klass 65-421-4801; cklas@ap.org |
