Anyone wondering whether investors believe Asia is recovering from its two-year downturn need look no further than the mutual funds that buy companies in the region. As a group, these funds have led the pack this year, especially in the second quarter.
While economists may still argue whether Asia is back, or has even stopped backsliding, investors have voted with their money. Among the standout performers have been funds that specialize in Japan, particularly small companies there. The $162 million Warburg Pincus Japan Small Company Fund and $99 million Japan Growth Fund returned 46 percent and 39 percent, respectively, in the second quarter.
South Korean funds also did well, with the $177 million Matthews International Korea fund up 74 percent in the quarter and 86 percent in the first half.
The eye-popping recent returns of Asian funds might lead some investors to wonder whether it's time to dip their toes back into the choppy waters of foreign markets, which have alternately tantalized and terrorized mutual fund shareholders throughout this decade.
In any event, for investors who held on through the darkest days of 1997 and 1998, there is now some cause for cheer. Even Latin American funds have prospered this year, as Brazil's economy has not faltered as much as expected and Mexico has escaped some of the financial woes besetting the region. The average Latin American fund gained 15.6 percent in the quarter and 39.1 percent for the year.
But the biggest gainers by far among foreign funds were those investing in Asia. Mutual-fund managers and others familiar with the region say that while investing there is still mainly for the fearless, the immediate prospects look promising.
Massive government intervention in Japan's economy, through fiscal stimulus programs, and interest-rate cuts in many developing Asian countries, have buoyed markets, the experts say, touching off what could be the beginning of a new growth cycle in the region.
"Our feeling is that emerging markets are in the early stages of a multi-year investment cycle," said Jay Pelosky, an emerging-markets strategist at Morgan Stanley Dean Witter. Pelosky believes the run-up will continue as Asian investors themselves reallocate money away from fixed-income investments into stocks in the wake of a series of interest rate cuts. He also predicts some U.S. investors will step back into the Asian markets as they view prospects in U.S. equity markets to be comparatively less rosy.
Mutual fund managers say investors are cautiously returning to Asian markets, including the emerging ones, but the activity is still below the frenzied pace of the mid-1990s.
T. Rowe Price Associates Inc.'s New Asia Fund, for instance, had assets of about $800 million at the end of April. While that is above the $600 million in assets it had during the 1997 trough, it is still less than half the $2 billion in assets New Asia held during 1993.
"Investors have had less appetite for international investments," said George Murnaghan, who oversees international funds for Baltimore-based T. Rowe Price. "I would expect as performance improves, investors will return."
Many fund managers predict performance will strengthen as investors realize some of the economic changes under way outside the United States.
Henry Frantzen, chief global investment officer at the Federated family of funds, said that while the U.S. Federal Reserve Board is now raising interest rates, much of the rest of the world's central banks are lowering rates to jump-start dormant economies and keep economic growth alive.
"The rest of the world continues to loosen, and that provides a lot of liquidity, and that's good for equities," Frantzen said.
Federated's international fund portfolio managers were "pretty much hiding in Europe" throughout 1998, awaiting a signal that Asia really is coming back, Frantzen said. Two of the firm's largest overseas funds, the $196 million International Equity and the $217 million International Small Company, had as much as 90 percent of their money in European markets a year ago. Today that amount has fallen closer to 50 percent, with money having been shifted into Asia.
International Equity rose 2.7 percent in the second quarter and 5.4 percent for the year to date, while the small company fund returned 24.3 percent in the quarter and 35.5 percent for the year.
"Restructuring is finally going on in Japan," Frantzen said, while the smaller economies of Asia, dubbed the "tigers," are recovering because of interest rate cuts that have lowered borrowing rates on average by about 5 percentage points.
Frantzen's funds--including Federated Asia Pacific, up 28.8 percent for the quarter and 42.2 percent for the year--favor big-name Japanese firms that are bent on corporate restructuring. These include entertainment and consumer electronics giant Sony Corp.
"We like the restructuring plays," he said. "This is where you're going to make the big money."
At Strong Funds, portfolio manager David Lui began buying Japanese stocks in February for his $91 million Strong International Stock Fund, and has been adding to his positions since. The fund returned 7.8 percent in the quarter and is up 11.5 percent for the year.
"We have seen the worst in Japan," Lui said. He shares Frantzen's enthusiasm for Sony but also likes Toshiba Corp., Canon Inc. and Hitachi Ltd. among the large, well-known Japanese companies. Another favorite in the financial sector is Daiwa Securities Co.
Lui is less sanguine about Korea, which he considers too volatile and susceptible to outside shocks such as tensions with North Korea, and Thailand, where he believes the health of the banking sector is still a question mark.
But one manager who likes Korean companies is Alfredo Viegas, who runs the $77 million Lexington Worldwide Emerging Markets Fund, up 19.3 percent in the quarter and 24.7 percent for the year.
Viegas believes some of the emerging markets are in the early stages of a maturation of their economies, where service-sector companies and technology providers are starting to gain momentum at the expense of traditional Asian manufacturing and commodity-producing firms. One Korean company Viegas likes is Dacom Corp., a telecommunications firm that also is active as an Internet service provider. Viegas compares Dacom to America Online but notes that its stock sells for a far lower multiple of its individual subscriber base.
"The stock's up sixfold from where we bought it," said Viegas, "and we still think it has upside."
Investors in emerging markets, and even developed economies such as Japan, need to be cautious, experts say. Even with the recent recovery, most mutual funds investing in Asia have proved to be poor investments over the past few years compared with, say, a broad-based U.S. equity fund.
While Fidelity's Japan Fund is up 97 percent so far this year, over the past five years its average annual return has been negative. The Standard & Poor's 500-stock index, meanwhile, has returned an average of more than 26 percent during the same time frame.
Still, foreign markets tend to follow different cycles than the U.S. market, and most financial advisers suggest that investors place a small portion of their overall portfolio in international investments, as it provides some diversification.
But, warned Strong's Lui, "if you ever invest in emerging markets, prepare yourself for a lot of volatility. They are not for the faint of heart."
Some money managers aren't quite so sure that foreign markets, especially the more volatile emerging markets, are where individual investors should be putting their money. They note that even with the recent pickup, many investors who bought into the emerging-markets story back in the mid-1990s have holdings that are worth less than they were then.
Instead, they suggest that investors looking for some of the bounce from rebounding international markets pick funds that invest in the largest U.S.-based multinational companies. There are many U.S. equity funds that own companies such as General Electric Co., Coca-Cola Co., United Technologies Corp. and Microsoft Corp.--all companies with considerable sales from Asia. Coca-Cola, for example, gets more than three-quarters of its profits outside the United States.
"I think you get an enormous amount of foreign exposure by owning U.S. multinationals," said money manager Elizabeth Bramwell. U.S. companies are forced to adhere to more stringent accounting standards and are more attuned to investor concerns than some of their foreign counterparts, she said.
CAPTION: Alfredo Viegas is the manager of the $77 million Lexington Worldwide Emerging Markets Fund, which gained 19.3 percent in the quarter and 24.7 for the year to date. Viegas likens South Korea's Dacom Corp. to America Online. "The stock's up sixfold from where we bought it," he said, "and we still think it has upside."