Emerging market funds weather the market swings

Emerging market funds weather the market swings
By Judith Rehak Published: April 13, 2007

Emerging market equity funds weathered wild market swings in the first quarter, managing to squeeze out single-digit returns on average.

Two groups in this often unpredictable category did far better than that. Offshore funds that focus exclusively on Malaysia gained an average 20.19 percent and those that invest in Turkey climbed 10.94 percent for the quarter, according to Standard & Poor's.

In Turkey, stocks rebounded from a dismal 2006 when they were beset by worries about inflation and the upcoming vote by lawmakers on the presidency and parliamentary elections scheduled for November. Concerns remain, but share valuations became too attractive for many investors to resist.

Foreign investors making direct investments in Turkish companies played an important role. Attracted by the untapped potential in Turkey, foreign investors often were willing to pay significant premiums over domestic investors.

"That boosted the entire market," said Ozgur Guneri, the executive vice president of Finans Portfoy, which manages two Istanbul-listed exchange traded funds; the Dow Jones Istanbul 20, which tracks major companies; and the Turkish Smaller Companies Istanbul 25.

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Offshore stock funds eke out gains in the first quarterForeign investment was especially positive for the insurance sector, which was just beginning to develop, Guneri said. His smaller company fund holds shares in two insurers, Anadolu Sigorta and Anadolu Hayat; both were up more than 20 percent in the quarter.

Eli Koen, manager of the Fortis Turkey Fund, also profited from insurance and banking. One of his winners was GarantiBank, whose insurance subsidiary is being acquired by Eureko, a Dutch insurer.

"Garanti has one of the strongest retail franchises in Turkey," said Koen, who expected more mergers and acquisitions in the sector.

Given the huge market, "they will be targeted by foreign players who want to be there," he predicted.

Some individual picks also performed well for Koen. One was Eczacibasi, the large Turkish pharmaceutical company, which he deemed undervalued. The company's generic pharmaceutical business is being acquired by Zentiva, a Czech company.

Turk Traktor, a farm machinery manufacturer, also gained in anticipation of lower interest rates that would enable banks to offer loans to farmers.

The forces that sent the Malaysian market soaring in the first quarter were decidedly different.

"Malaysia is a country on the move," said Jane Leung, portfolio manager of the U.S.-domiciled iShares MSCI Malaysia, an exchange-traded fund, which rose 18.1 percent. She cited growth in traditional electronics exports, but also growth in domestic consumption, as well as government policies to encourage foreign investors and venture capital providers. Another driver of the market was investors seeking an Asia play outside of China.

Property was among the strongest sectors in the first quarter, reacting favorably to the end of a capital gains tax on property sales.

The Leung fund owns shares in Gamuda, a builder, and SP Setia, a major developer. Property activities also benefited TA Enterprise, the largest Malaysian brokerage, which reportedly will form and sell shares in a real-estate investment trust, investing the cash in the booming luxury condominium market in Kuala Lumpur.

"There has been a lot of demand for real estate and REITs in the past few years," Leung said.

Another large position is IOI Property, a major palm oil producer, which is enjoying higher prices and the growing interest in alternative fuels. Shares of IOI rose as it announced that it would acquire other producers, and the possibility that it may return cash to shareholders.