Diamonds in the emerging-market rough

www.iht.com Judith Rehak International Herald Tribune January 20, 2003   A new populist president in Brazil, a landslide victory for an Islamic-based party in Turkey, a terrorist bombing in Indonesia, plus tensions over Iraq and nuclear saber-rattling from North Korea: Even by emerging-markets measures, the fourth quarter was unusually eventful. Nevertheless, many emerging-market funds beat their developed-country counterparts, and a few with nerves strong enough to take advantage of the turbulence turned in stellar performances. On the relatively calm side, oil and banks proved to be a profitable combination for funds that invest in Europe’s emerging markets. The Luxembourg-domiciled Pictet Eastern European Fund rose 17.4 percent, reinforced by stakes in Russian energy producers as crude oil prices spiked at $32 a barrel. Another winner for the fund was Komercni Banka AS of the Czech Republic. ‘‘The main story was that it was overprovisioned for nonperforming loans, which then did better than expected,’’ said Jack Arnoff, co-manager of the portfolio. The excess cash will now raise the bank’s book value. But the fund’s performance got an extra boost from a nimble bet on Turkey’s notoriously volatile stock market. Managers took a position before the market surged 50 percent leading up to the November elections, and then took profits before it tumbled back. ‘‘That differentiated us from our competitors, because most of them don’t invest in Turkey,’’ Arnoff said. By comparison, offerings that specialize in Asia’s smaller economies had a weak quarter. The Matthews Pacific Tiger Fund was the top U.S. offering, up 6.7 percent, compared with 2.8 percent for the sector. Mark Headley, who co-manages the growth-oriented portfolio of some 50 stocks, said that while the focus of the fund is not technology, much of its fourth-quarter performance was tech-driven. ‘‘There’s a tremendous outsourcing story going on in Asia,’’ Headley said, citing one example: Hon Hai Precision Industry Co., a Taiwan engineering company that designs everything from computers to VCRs and builds them in China. Another winner was Internet Auction Co., a South Korean company that is a dual play on domestic consumer spending and technology. The stock leaped more than 50 percent in the quarter. The company is half owned by eBay Inc., the U.S. online auction leader. But Headley also took a calculated risk in Indonesia. Already a shareholder in Astra International TBK, the big auto assembler and distributor, he bought more when the stock market plunged after the October terrorist attacks in Bali. ‘‘I don’t think Bali was about domestic problems,’’ he said. He was rewarded when Astra re bounded 85 percent from its post-attack low. The fourth quarter also showed how misleading a three-month performance can be in these unpredictable markets. Once Brazil’s political situation calmed, Latin American equity funds rebounded to the top performing category, gaining an average 16.8 percent. But that was not enough to wipe out their losses in a disastrous year when they were also hammered by Argentina’s debt default and, more recently, by political chaos and the general strike in Venezuela. But interestingly, Brazil and Columbia proved to be a catalyst for the ING II Emerging Market Debt Fund, which soared 21 percent in dollar terms in a category that beat most equity offerings for the quarter and the year. With a hefty 17 percent bet in Brazil, the fund was well positioned once the bond market began to recover. ‘‘We added before the election but also after as we became more encouraged,’’ said Rob Drijkoningen, the portfolio manager. To illustrate what fueled the fund’s outperformance, he noted that Brazilian Brady bonds, trading below 50 cents on the dollar in mid-October, are now above 70 cents. ‘‘And that’s on top of a current coupon of 8 percent,’’ he said. ____________________________ For more information: ING II EMERGING MARKETS DEBT FUND. Web site: www.ingfunds.com MATTHEWS PACIFIC TIGER FUND. Web site: www.matthewsfunds.com PICTET EASTERN EUROPEAN FUND. Web site: www.pictetfunds.com