Thursday, October 19, 2006

Managers See Frontier Opportunity

Tapping Emerging Markets Such as Vietnam,Malaysia Often Carries Greater Risks

The Wall Street Journal
October 19, 2006; Page C12

As the emerging-markets universe expands, mutual-fund managers are working harder to find investment opportunities in previously untapped places, with countries such as Vietnam, Malaysia, Bulgaria and Botswana among the stops on their itinerary.

The road can be rough. Many of these frontier emerging markets are small, and trading liquidity is often a problem. But moves are afoot. Recently, one of the biggest players in emerging markets, Franklin Templeton Investments, introduced an actively managed fund aimed at smaller markets, Templeton Emerging Markets Small Cap Fund.

"One of the things we were getting from our customers was 'Why aren't you in Estonia? Why aren't you in Romania or Vietnam?' " said Mark Mobius, a veteran investor who will be the lead manager of the fund. It will focus on companies with a market value of between $300 million and $1 billion. Nigeria, Bolivia, Peru, Panama and Vietnam are several of the countries it expects to tap, with about 200 portfolio holdings in total.

Of course, there are considerable risks to such a specialized fund, notably liquidity: These markets often have relatively few active investors, which can make it tougher to buy or sell in significant quantities. Mr. Mobius said the fund is probably less suitable for an investor new to emerging markets.

In any case, investors who own an emerging-markets fund probably are already exposed to smaller capitalization companies, said Bill Rocco, senior analyst with investment researcher Morningstar Inc. Moreover, diversified international funds have about 10% of assets in developing markets on average, though much of this investment likely centers on bigger countries, he said.

"I'm not so sure you have to go to the uncharted," Mr. Rocco said. "There's always been a natural growth [in emerging markets] over time, but that doesn't mean you still can't find opportunity in the established ones."

South Korea, Taiwan, Brazil, Russia and South Africa are among the most popular emerging markets for fund managers, according to research firm Emerging Portfolio Fund Research. But many managers are branching out, said Brad Durham, an EPFR managing director. "A lot of these funds are starting to reduce weightings to Korea, Taiwan, Brazil, South Africa and India," he said. "There's a bit more comfort with the less-liquid markets."

Driehaus Emerging Markets Growth Fund has ranked among the top diversified emerging-markets funds for the past three years, according to Morningstar. Manager Emery Brewer had positions in Malaysia, Indonesia, Poland, Kazakhstan and the Philippines as of June 30. Nearly half of the fund was invested in small- to medium-size companies.

Mark Headley, who manages Matthews Pacific Tiger Fund, said Vietnam is "rapidly becoming one of the hottest alternatives" to investment in China. Still, he says, "smaller companies in developing markets are incredibly dangerous and incredibly exciting. My base line is you have to visit them twice a year. It's incredibly time consuming."


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