Managers See Frontier Opportunity

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

By BARBARA KOLLMEYER
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."

Thai Prime Minister Will Reach Out to Insurgents

Surayud Makes ShiftFrom Hard-Line PolicyOf His Predecessor

Associated Press
October 19, 2006

KUALA LUMPUR -- Thailand's new prime minister said he will use peaceful means to resolve the Muslim insurgency in the country's southern provinces -- a clear reversal of the iron-fisted strategy of the previous government.

Prime Minister Surayud Chulanont, on a one-day visit to Malaysia, said he will reach out to all minority Muslims in the predominantly Buddhist country to end the separatist insurgency, which has claimed more than 1,700 lives since January 2004.

"We will try to talk to a lot of people," said Mr. Surayud, a former army general who was named Thailand's interim prime minister after the Sept. 19 bloodless military coup that ousted the elected government of Prime Minister Thaksin Shinawatra.

"I told the Malaysian prime minister that I would talk to the Muslim leaders in the south, to the kids in schools. That's the way I am trying to present myself -- by way of talking," he said.
Mr. Surayud added that his "personal strategy" was to try "to resolve these problems by peaceful means."

The comments mark a turnaround from the hard-nosed approach adopted by Mr. Thaksin who sent thousands of troops to the south to crush the insurgency, a strategy that achieved little success.

Mr. Surayud made the comments after talks with his Malaysian counterpart, Abdullah Ahmad Badawi.

Both leaders said they will remain in touch by telephone to discuss any problems that arise in southern Thailand.

Mr. Surayud's visit comes amid efforts by former Malaysian Prime Minister Mahathir Mohamad to mediate between the Thai government and Islamic separatists who operate in the three Muslim-dominated provinces bordering Malaysia.

The insurgency had also soured relations between the two neighbors with Mr. Thaksin's government frequently accusing Malaysia of harboring the militants. The Malaysian government denied the charge.

Malaysia's only concern is that the Muslims in southern Thailand -- who are of the same ethnicity and religion as Malaysian Malays -- "live in peace and without fear," Mr. Abdullah told reporters.

Contrary to predictions in the Thai media, Mr. Surayud didn't seek the repatriation of 130 Thai Muslims who fled to Malaysia more than a year ago, citing fear of persecution by Thai security forces.

Mr. Abdullah said he and Mr. Surayud agreed that the Thai Muslims are welcome to "return in peace" to Thailand if they want to. "But if they want to stay on for a while we would also be willing to host their presence in Malaysia," Mr. Abdullah said.

He also said that it is normal for many Thai Muslims who "profess allegiance to Malaysia" to cross over to Malaysia time and again.

"It is not to be interpreted in any way that there is intention on our part to interfere with whatever that is happening on the Thai side," said Mr. Abdullah.

The new Thai government has said it wants to hold talks with insurgent leaders and has been in contact with some, but hasn't publicly said when.

Malaysian government leaders have responded by saying they are willing to host peace talks if both sides agree.

Mr. Surayud, on his first visit to Malaysia since taking office Oct. 1, was accompanied by Defense Minister Gen. Bunrod Somtad, Foreign Minister Nitya Pibulsongkram and Interior Minister Aree Wong-araya.

Mr. Surayud will visit Indonesia on Saturday, the Philippines on Oct. 23 and Vietnam on Oct. 26. He has already been to Laos and Cambodia, as part of a familiarization tour common among new Southeast Asian leaders.