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Knowing His Places

Templeton Emerging Markets' Mobius Looks Hard at Numbers, People

May 13, 1997

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.

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