Newsgroups: biz.americast.samples
From: americast-post@AmeriCast.Com
Organization: American Cybercasting
Subject: FUND SURVEY
Date: Sat, 29 Aug 92 14:53:54 EDT

This is an actual portion of the electronic edition of Forbes, as
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FUND SURVEY

The next Chile?

By Claire Poole

Emerging country funds deliver sometimes explosive
returns-and an occasional appalling collapse.

FRANCISCO RODRIGO, the 31-year-
old portfolio manager of the First
Philippine Fund, thought he had a
winner with Metro Drug on the Ma-
nila and Makati stock exchanges. In
the first nine months of 1991 the
company earned 60 million pesos
($2.2 million). Rodrigo figured it
could do $2.8 million for the year.
 But when Rodrigo visited the com-
pany in March, he was told that it was
going to report an inventory write-
down and a yearly loss equivalent to
$5.7 million. What happened in the
fourth quarter? ''Clerical errors'' was
the answer, which could have meant
anything from undocumented receiv-
ables to employee pilfering. Rodrigo
has been gradually unloading his 37-
million-share position at a loss. Says
he: ''I can understand natural disas-
ters. But this takes the cake.''
 Such are the hazards of investing in
developing countries. When the mar-
kets are good, they are very good: In
the past 12 months Philippine and
Chilean stocks averaged gains of over
55%, and Argentinean stocks nearly
tripled. And when they are
bad, they are horrid. In re-
cent years stock markets in
both Brazil and India suffered sudden
crashes related to scandals. Ross Perot
sent the Mexican market reeling with
an attack on free trade.
 Emerging country stock exchanges
can be illiquid-with stocks not trad-
ing for weeks at a time-and highly
volatile. Three years ago the Korean
market was the hot spot after surging
an average 93% a year for three years.
Since then Korea has undergone bil-
lowing trade deficits and a weakening
currency, and its market's return has
averaged a negative 14% a year. Wil-
liam McBride follows 200 closed-end
emerging country funds for Lipper
Analytical Services. Drawing on his
experience, he says: ''These funds
stumble and they fall. And when they
fall, they fall hard.''
 If you're intent upon buying into
developing country stocks, funds are
the way to go. Look for funds that
have beaten their local averages. Also
consider efficiency: Assuming you
buy a closed-end_and that is likely to
be your only choice_you want one
that sells at a discount to net asset
value (or, at worst, a small premium)
and doesn't take off too much in fees
and expenses. Also, plan to stick it out
for at least five years, come what may.
In the Philippines' case, the last three
years have been made interesting by a
coup attempt, two earthquakes, a ty-
phoon and a volcanic eruption.
 For novice investors, McBride ad-
vises acquiring a global fund where
managers move your money in and
out of various individual countries as
they think wise. Three such funds he
follows returned an average 21% a
year over the past three years. The
best-performing of these is Temple-
ton Emerging Markets Fund
(FORBES, Jan. 25, 1988). Mark Mobi-
us runs the fund from Hong Kong
and has attracted a following. As a
result, the fund's shares are trading at
a 13% premium to net asset value.
Less expensive_and established_is
the Morgan Stanley Emerging Mar-
kets Fund, which has already earned a
23% return in its first seven months
under manager Barton Biggs. His tal-
ent comes at a 2.6% discount.
 The Latin American Investment
Fund, two years old and managed by
BEA Associates' Emilio Bassini, re-
turned 55% over the last 12 months
and recently was selling at a 5% dis-
count to net asset value. The Scudder
New Asia Fund, managed by Andrew
Economos, has averaged a 16% a year
return over the last three years and
recently traded at a 1% premium.
 Of course, if you have faith in a
particular economy, you may prefer
to invest in a single country fund; but
be prepared for volatility, and don't
sell out at the first sign of riot, earth-
quake or political upheaval.
 Whatever country you like, stay
away from initial public offerings,
which arrive at a 5% to 7% premium to
net assets and, sometimes, with a
blank check on expenses.
 The latest hot spot is China, with
three funds coming to market: the
China Fund, managed by Wardley
Investment Services in Hong Kong;
the Greater China Fund, managed by
Baring International Investment; and
the Jardine Fleming China Region
Fund, managed by Jardine.
 The market is getting a little crowd-
ed. The total value of mainland Chi-
nese shares legally available to foreign
funds is but $460 million. With Chi-
nese stocks trading at multiples from
40 to as high as 200, Templeton's
Mobius is staying away. The new
Chinese funds will probably put a lot
of their money in Hong Kong, but
that market has already had a big run
in the past year and a half.
 If the past is any guide, these China
funds will eventually sell at a discount
from net asset value. If they don't do
so right away you can be reasonably
sure some bad news will come along
and knock them down.
 Emerging markets typically double
when opened up to foreign invest-
ment. Locals jump into the market
before the foreigners, bidding up
prices. Later on, when reality sets in,
these markets typically lose 20% to
50% of their gain. McBride says it has
happened in Indonesia, Thailand and
India, and, to a lesser degree, in Ko-
rea. The time to buy is a few years after
that initial wave of euphoria.
 The biggest disappointment to
date among the emerging country
funds has been the Turkish Invest-
ment Fund. The Istanbul Stock Ex-
change has dropped 80% since the
fund's startup in late 1989. The fund
has outperformed the Turkish stock
average but has still taken a beating.
Maybe Istanbul stocks are a buy right
now. The Turkish Fund would have
made our Best Buy list shown on page
102 if not for its high expense ratio
and 14% premium.
 Best Buy candidates are scored on
two criteria: performance and effi-
ciency. For performance, we looked
for single country funds that did well
relative to their respective stock mar-
kets and for international funds that
did well relative to the Morgan Stan-
ley overseas index shown on page
160. Our efficiency measure rewards
low annual expenses and high dis-
counts to net asset value.
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