Scouring the globe for ideas

Scouring the globe for ideas BY BEN PAUL DR MARK MOBIUS' private jet is revving up its engines, preparing for take-off from a runway at Subic Bay in the Philippines. Suddenly, the control tower orders the plane to stop. "What's the matter?" asks the president for emerging market equities at Franklin Templeton Investments, recounting the story to reporters in Singapore over lunch recently. "The people in the tower want a hundred bucks each," was the reply. To be sure, immigration, customs or airport officials in developing countries asking for "tips" is something that many travellers have encountered. But air-traffic controllers demanding payment before allowing a plane to leave the ground was a first even for Mobius, whose search for promising companies regularly takes him to Latin America, Eastern Europe and the Middle East besides Asia. So, does the incident give him pause about investing in the Philippines? "Damn right it does," he laughs. "It gives me a lot of pause." The unpleasantness aside, though, that was exactly the sort of firsthand insight into how emerging-market countries and their companies work that keeps Mobius on his punishing travel schedule, despite having a capable team of portfolio managers and analysts around the globe keeping track of things. Investing in emerging-market countries isn't as new an idea as it was when Mobius first arrived at Templeton Asset Management in 1987. In fact, several of these markets that global investors might have considered exotic and a little dangerous two decades ago are thought to be a lot more mainstream and hospitable today. "Probably the most interesting and critical indicator is the spread between emerging-market bond rates and US Treasury bond rates," says Mobius. Over the past decade, that spread has narrowed from as high as 17%, or 1,700 basis points, to about 2.8% now. "That decline is mirrored by the rise in emerging market stocks," he adds. There are fundamental reasons behind the pick-up in investor interest. For instance, many companies in emerging markets have improved their balance sheets and are starting to pay more attention to shareholder value. In addition, many emergingmarket countries are running large current-account surpluses and building up a wall of foreign-exchange reserves. "China's foreign-exchange reserves are reaching the size of Japan's -- over US$700 billion," says Mobius. "[South] Korea, Taiwan, Hong Kong, Singapore, Russia, and a number of other countries, now have foreign-exchange reserves in excess of US$100 billion. So, this has given confidence to people that if they lend to these countries or their companies, they will be able to pay it back." Despite the steep rise in emerging-market equities over the past couple of years, Mobius is still confident. "If you look at the valuations -- the price-to-earnings ratios, the price-to-book ratios, the dividend yields -- you will see they are still far [better] than the US and other developed countries," he says. In terms of individual markets, South Korea is currently the top holding within Franklin Templeton's global emerging-market funds. Its Singapore-registered FTF-Emerging Markets Fund had a 14.7% weighting in that single market in August, according to its last factsheet. "We look at the valuations between compa nies... and they are so much cheaper [in South Korea]," says Mobius. Close behind are Taiwan and China, which accounted for 12.2% and 8.6%, respectively, of the FTF-Emerging Markets Fund's holdings in August. Singapore also features prominently in the fund, with a 4% weighting that month, despite not being included in its benchmark index. Singapore companies also sometimes offer an outright cheaper means of accessing the growth offered by some emerging-market countries. "In some ways, we prefer to buy Singapore Telecom [SingTel] to Bharti, because it is cheaper and we get exposure to India," says Mobius. SingTel owns more than 30% of Indian telecommunications group Bharti Tele-Ventures. Mobius is less optimistic about India, calling its stock market "frothy". However, he adds that the emerging economic giant has some great companies and Franklin Templeton plans to continue to invest in its market. India wasn't listed among the FTF-Emerging Markets Fund's top geographical exposures in August. While Asia accounts for more than half of the global emerging-markets universe, Mobius urges investors not to ignore Eastern Europe and Latin America, which have also been delivering stellar returns. "Be diversified," he says. "Don't count out these other places. Brazil, for example, is now the cheapest of all the emerging markets and looks good from the macroeconomic point of view." However, despite the best efforts of Mobius and his team at Franklin Templeton to ferret out the most attractive bargains offered by emerging markets around the world, the performance of the FTF-Emerging Markets Fund has consistently trailed the MSCI Emerging Markets Index. Since its inception in June 1996, the fund has returned an annualised 5% versus the benchmark's 7.56%, according to its last factsheet. Mobius attributes this performance to structural constraints within Franklin Templeton's funds. "A good example is our [South] Korea fund," he says. "Samsung Electronics represents about 30% of the index, but the most we can put in the fund is 10%." Then there is the "5-40 rule", which limits holdings that account for more than 5% of a fund from adding up to more than 40% of its total assets. But the rules to enforce diversification within its funds are there for a reason, Mobius adds. "Our funds may be underperforming the index, but when these markets turn down... when Samsumg has problems... our downside is limited." And, as Mobius' story about being held up on the Subic Bay runway demonstrates, investors in emerging markets will encounter occasional, unexpected setbacks. -- The Edge Singapore