Knowing His Places

The Templeton Emerging Markets fund truly can claim to be No. 1. This foreign-stock portfolio recently celebrated its 10th birthday with the best total return over the last decade of any mutual fund tracked by Morningstar Inc. of Chicago, of either the open-end or closed-end variety.

Templeton Emerging Markets, which is a closed-end fund trading on the New York Stock Exchange, scored a 22.3% average annual gain over the decade ended March 31. The typical open-end U.S. stock fund’s average annual gain in that period was 11.4%.

The man who built the Templeton fund’s record, J. Mark Mobius, remains at the helm, working out of offices in Hong Kong and Singapore and spending most of the year beating the bushes in Asia, Latin America and Eastern Europe in search of undervalued stocks.

Mobius joined Templeton in 1987 and serves as managing director of its Far East division. He is conversant in several languages and has lived and worked in East Asia for most of the last three decades. He has a doctorate in economics and political science from the Massachusetts Institute of Technology.

Among other portfolios, Mobius also runs Templeton Developing Markets, an open-end fund. He was in Moscow recently when Russ Wiles, a mutual funds columnist for The Times, caught up with him by phone.

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Times: It’s difficult to get some American investors to think about foreign markets, especially higher-risk emerging markets, with U.S. blue-chip shares doing so well. And the U.S. market has outperformed most foreign markets for much of this decade. Do you think that will change?

Mobius: It’s already changing. Certain individual markets, such as Russia and Turkey, for example, both have outperformed the U.S. over the past year or so. Many emerging markets have done better.

Times: In fact, the Templeton Emerging Markets fund’s share price is up 15.4% this year, which is actually greater than the 13% rise in the Dow Jones industrial average. What’s fueling the gains in emerging markets?

Mobius: Plain old undervaluations. A lack of liquidity drives prices as well. Because emerging markets are imperfect and volatile, you get excessive valuations on both the upside and downside.

I think the big story is the tremendous expansion in emerging markets--the growth of these markets in terms of capitalization, the number of shares being listed and the number of countries available for investment now. When we started in 1987, only 10 countries were available to us. Now we have over 40 countries. The selection and availability are astounding.

Times: Any countries or regions in the world where you’re finding exceptionally good opportunities right now?

Mobius: Yes. After Hong Kong, our largest and most important holdings are in Latin America. We’re finding lots of value in Brazil, Mexico and Argentina because of the changes taking place in Latin America and the transformation of those economies to ones that are primarily market-driven, with an important privatization theme.

Times: Any countries or regions you’re avoiding these days?

Mobius: Not really. Even in markets that have been booming--Hong Kong, for example--there are still many bargains.

Other emerging markets have corrected this year, presenting good opportunities. Stocks in Thailand, for example, have come down to major low levels, so we’ve been looking there more aggressively.

Times: Describe the process you follow in researching individual companies.

Mobius: First, we look for audited financial statements. If a company does not have proper audits, then we have to be very careful.

Times: Audited according to U.S.-style “generally accepted accounting principles” [GAAP]?

Mobius: That’s the ideal, but unfortunately GAAP is interpreted in many ways, in almost every country. In some cases, like in Russia, there is no GAAP accounting; the Russians have their own system. So the first step is understanding how the accounting works. The second step is determining how the taxation system works, because the accounting often is driven by taxation.

After that, we try to obtain the records of these companies. Very often, they’re either not available or not available in a form that can be easily understood, so we have to work on that. Then we’ve got to know something about the industry in that particular country, the history of the company and the people in it. If we’re dealing with people who, for example, do not respect minority shareholder rights, it could lead to problems.

Times: How else can you tell if a management team is acceptable, especially in countries where the business culture may be far different than in the West?

Mobius: We look at the background of the people operating a company by interviewing others who are familiar with their business. If a company has a history of suspicious dealings or a reputation for bad-business practices, we try to shy away. In every culture, there is an acceptable way of behaving.

Although we may invest in companies where management tests the limits of that acceptable behavior, going beyond the pale would tend to result in our avoiding the investment.

Times: Among your current holdings, name a couple of stocks that exemplify what you look for in emerging-market companies.

Mobius: Probably the best example is a company called Cheung Kong Holdings in Hong Kong, which is run by a Chinese entrepreneur who has been very successful in building value for himself and shareholders of his company. That’s been an excellent investment over the year. Cheung Kong is involved in many things, but the prime profits come from property development.

Another good example is Hong Kong & Shanghai Bank. The company was started in China and has expanded throughout the world. Other good examples would be some of the Argentine banks, such as Banco Frances.

Times: Is there something special about bank stocks at the moment?

Mobius: Bank stocks around the world are yielding good results because of the impact of technology. New methods of servicing clients using automated teller machines, [new] communications systems, more powerful computers and other technological advances are increasing the profitability of banks.

In addition, banks in emerging markets often have a leading position in the [local] economy.

Times: Hong Kong has long been one of your favorite markets, and you have lived there, at least part time, since the 1960s. What’s your take on the looming takeover by China, especially from an investment perspective?

Mobius: We’re not taking a Pollyanna view on this. We realize there are risks and problems, but that’s true of any emerging market. We’ve assigned roughly a 70% chance of things going well and only a 30% chance of possible problems. The reason we feel that way is that the Chinese have been very pragmatic and have learned a lot about Hong Kong over the years since the agreement with the U.K. was signed. They also have liberalized their own economy to a substantial extent.

Our stance is that China is such a major economy, we have to be committed as emerging-markets specialists to that country. With that in mind, we recently purchased an entire floor of the Shanghai Stock Exchange, in a new building under construction. So we’re committed to China, and that means we also must be committed to Hong Kong.

Times: Do you own any Russian stocks for Templeton Emerging Markets?

Mobius: For the closed-end fund, we’re just beginning to nibble at Russian stocks. But we also have our [closed-end] Russia Fund, which trades on the New York Stock Exchange, and we have been allowed to put more money in the Russian market for that.

But we’ve been going very slowly because the availability of stocks leaves a lot to be desired and the liquidity is not so good. But going forward, if things continue to develop as they have been in Russia, we will go in deeper.

Times: You run both open-end and closed-end mutual funds. Which do you consider a better type of fund for emerging-market investing?

Mobius: They both have good and bad points. The nice thing about our open-end funds is that our clients have been listening to what we’ve been saying about long-term investing and buying when things don’t look so good. So even in bad markets like we had during the Mexican [peso-devaluation] crisis [in 1994], we had a net inflow of money.

When people are giving you money during market crashes or declines, you as a manager can do a better job by putting it to work at low prices. So it’s very much a cooperative effort on the part of managers and investors, and in some ways an open-end fund can do better.

On the other hand, if you encounter a lot of volatility, closed-end funds are nice because you don’t have to worry about redemptions. [Closed-end funds raise a fixed amount of money by selling a limited number of shares, then close to new investment; the shares trade on major stock exchanges, and the price of the stock tracks the underlying portfolio, but may trade above or below the portfolio’s worth at any given moment.]

Times: Your travel schedule has become legendary in the mutual fund industry. How much are you on the road?

Mobius: In reality, I’m constantly traveling--roughly 250 days a year. We have bases for our emerging-markets division in Hong Kong and Singapore, with a whole team of people in those places constantly monitoring the portfolios, making sure that all of the due-diligence legal and accounting aspects are taken care of.

But it’s my job and that of my analysts to find out what’s happening on the ground. This business involves a tremendous amount of traveling, which means you don’t have much of a personal life. I don’t consider that a bad thing because I love what I’m doing.

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Templeton Emerging Markets

Strategy: Seeks long-term appreciation by investing in companies in developing nations.

VITAL STATISTICS:

Share price appreciation, year to date: +15.4%

Avg. open-end emg mkts fund return, YTD: +11.8

10-yr avg. annual return, through March 31: +22.3

10-yr avg. annual retun for average open-end international stock fund, through March 31: +8.7

Five biggest holdings as of March 31: 1. Cheung Kong Holdings 2. Alpha Credit Bank 3. Ergo Bank 4. Banco Comercial Portugues 5. Eletrobras

Latest share price: $21.50

Latest net asset value per share: $20.62

Current share price premium to net asset value: +4.3%

Stock ticker symbol: EMF (trades on NYSE)

Phone: (800) 292-9293

Assets: $325 million

Expense ratio: 1.71%

Morningstar risk-adjusted performance rating, 1-5: 5 stars

Source: Morningstar Inc.