Foreign markets worth a look

04/20/03 - Posted 11:36:03 PM from the Daily Record newsroom By Warren Boroson, Daily Record

It's a good time to invest in closed-end funds -- especially, emerging markets' funds. That's the view of Mark Mobius, who runs various Franklin Templeton foreign stock funds.

Closed-end stock funds are cheap, he believes, because most investors have been piling into bond funds.

"Look around the world," he said at a closed-end fund conference last week. "Things are so cheap. The gap in price-earnings ratios and in book value between the United States and emerging markets is as great as it's ever been. Everyone owns bonds, but bonds are at their top. Now is the time to look at stocks."

His favorite foreign country: South Africa.

Mobius, who has a doctorate in economics and political science from MIT, is a peripatetic investor, traveling around the world on his private Gulfsteam IV jet. Advertisements for his funds have featured his shiny bald head -- a posture in accord with his easygoing, cheerful, I'm-just-an-ordinary-guy charm.

He will even talk about his mistakes. Such as the time that he invested in a company in a tiny foreign country because when he visited its stores, the parking lots were jammed. Later, he discovered -- to his chagrin -- that it had been raining cats and dogs there for two weeks and this was the first opportunity that people had to do any shopping.

Another example of his modesty: In his talk last week, he mentioned that a Scotsman -- not overjoyed about Mobius' recent track record -- called him Dr. Dubious.

Once Mobius was scheduled to appear on a radio program that I was hosting. He didn't make it: Stuck overhead in an airplane. He fell over himself with apologies and quickly arranged another interview.

Where would he invest today?

"South Africa is at the top of my list," he said. "Some of the best companies in the world are in South Africa."

He also mentioned South Korea. And he said Argentina and Brazil were "interesting." As for China, "You're not going to step into a pile of gold there, but there will be growth there."

Closed-end funds are mutual funds that trade directly among investors, through a stock exchange, not through the fund. One result is that shares of a closed-end fund may trade at prices higher, or lower, than the total value of the securities that it owns. The whole may be worth less, or more, than the sum of its parts. (Usually less.)

Such funds have one big advantage, Mobius noted. If investors become agitated and sell their shares, a closed-end fund doesn't have to sell its holdings to pay them off. Investors must sell their shares to one another. This is a blessing in particular for emerging-markets funds, where it's often tough to sell large blocs of shares -- which is why so many emerging-markets funds are closed-ends.

With an open-end fund, the fund company may be forced to sell its securities when investors become agitated -- securities that the fund probably was eager to continue owning. Mobius said, "There's no way an open-ended fund can be in emerging markets."

A big disadvantage of closed-ends is that they often trade at a discount to their underlying value. "And there's no way we can raise the prices -- apart from road shows" (appearing at public meetings), Mobius said.

Buying back shares might seem to be a solution, he went on, but it doesn't always work. The fewer shares outstanding, the higher the costs of running the fund.

Besides, the Securities and Exchange Commission has enacted restrictions against closed-ends buying their shares. Mobius said he would love to be able to buy back shares of his funds at certain times when investors sell.

The question of how to eliminate the discount, without open-ending a closed-end fund will remain a hot topic, Mobius said.

Another disadvantage of closed-ends, Mobius said: Brokers don't want to sell closed-ends funds. "We have to make it more attractive to brokers to trade closed-ends."

He acknowledged that some investors are skeptical about foreign markets in general because of problems with corporate governance: crooks running stock markets. "I am happy to say," he added with a laugh, "that these days, the United States has the same problem."

What countries doesn't he like?

He said he'd probably get into trouble by answering, but he mentioned Venezuela, Colombia, Ecuador, Peru. He is also out of Pakistan -- its market is "illiquid" -- and he considers the Philippines a "problem."

Japan?

Everyone else seems to think that the country is "a mess," but finally, Japan seems to be paying attention. "I have a lot of faith -- I think Japan will pull through."

As for Iraq, "Its market is booming," he said. "We're looking at both Iraq and Iran. Muslim countries are interesting."

Someone asked: What exactly are emerging markets?

The leading definition, Mobius said, is all the low- and middle-income countries. Later, he said -- with a laugh -- that he invests wherever he wants.

Closed-ends began in 1822 in Belgium, Mobius said, and the first U.S. closed-end started in 1893, 30 years before the first traditional, open-end fund. The first Templeton emerging-markets fund was a closed-end, Mobius said.

In 1993, he said, his sister-in-law bought one of his emerging markets funds at the top of the market. The next year, he was scheduled to have dinner with her at her home in Buffalo, N.Y. He rang the bell; opening the door a crack, his sister-in-law told him that she wouldn't let him in until he gave her back the money she had lost.

So he said to her, "I'll tell you how to make the money back." "How?" she asked.

"Buy more shares.

"She slammed the door in my face."

I'll be teaching a course on "All About Investing … for the Absolute Beginner" at the County College of Morris from 7 to 9 p.m. Wednesday. Cost: $25. To register, call (973) 328-5000.

Warren Boroson can be reached at wboroson@gannett.com or (973) 428-6647.

Boroson on Money appears Tuesday, Fridays and Sundays in the Daily Record.