As Daniel J. Fuss left church a few Sundays ago, a friend approached him and said she was praying for him and the Loomis Sayles Bond Fund he manages. "I thanked her, since you can always use prayers, but I don't think my bond fund needs any," he says.
Others might disagree. That's because Fuss is "belly-deep" in hugely discounted emerging-market debt he bought in an effort to pump up his $1.5 billion corporate bond fund's yield and performance. "There's true value in these bonds even if they never trade again," says Fuss.
As expected, the fund has suffered. It lost 4.23% year-to-date and is down 0.61% since Aug. 31, 1997, compared with gains for all corporate bond funds of 4.36% and 8.05% for the same periods. Meanwhile, Franklin Templeton's Mark Mobius, the manager of some $12 billion in emerging-market stocks, is continuing to buy equities in developing nations even as his funds--such as Templeton Developing Markets, which is down 50% for the year through Aug. 22--take a serious beating. "I'm optimistic because prices are right for the first time in a long time," Mobius said on a Sept. 1 call to financial analysts.
If these veteran managers are right and emerging markets turn around, their funds will see a spectacular recovery. If they're wrong, the havoc wreaked on returns is likely to burden their funds for a long time to come.
"CAUTIOUSLY." Do they know something others don't? Fuss thinks that as long as he buys world-class companies with little risk of default, then the worst case is that he holds the bonds to maturity. "As long as they pay their bills, we'll make money" despite any price declines, says Fuss. He has invested 17% of his portfolio in mostly corporate Asian and Latin American debt and would buy more if he "could get my hands on it." He's brushing up against the fund's 20% limit in emerging-market debt.
In Asia, where spreads are 700 to 900 basis points over U.S. Treasuries, he is sticking primarily with corporate debt such as Korean Electric, Pohang Iron & Steel, Asia Pulp & Paper, Telekom Malaysia, and Philippine Long Distance Telephone. "In the Great Depression, how many telephone and electric companies defaulted?" Fuss asks. In Latin America, he likes the most widely traded Brazilian Brady bonds, big global issues such as those in Argentina, and a couple of corporate credits in Chile and Mexico. "The returns on these bonds are four to five times what I can get on U.S. corporates," he argues.
Mobius sees the same value as Fuss, but in stocks. He has been buying all the way down through the crisis, and his funds show it. The net asset value of his flagship Templeton Emerging Markets is down 23% year-to-date and 39% for the 12 months ended Aug. 22. Templeton Dragon, a Pacific Rim fund that excludes Japan, is down 35.86% and 56.90%, respectively. Mobius thinks there's more bad news to come that will roil the markets. But he's not holding off his stock purchases: "We're buying cautiously because while prices have come down to dumping levels, many of these companies won't remain in existence."
Specifically, Mobius likes Korea and Thailand because both "have bitten the bullet and are on the recovery trail by trying to adhere to [International Monetary Fund] advice and programs and selling off assets." In Korea, he's buying companies with big capitalizations and lots of liquidity with minimal leverage. While Mobius is avoiding the big blue chips Hong Kong's government program has attempted to buoy, he says there are "lots of good bargains." In Indonesia, he likes PT Tambang Timah, the largest producer and exporter of tin in the world.
Both Fuss and Mobius have made their mark breaking out ahead of the pack. But given the condition of most emerging markets, a little prayer can't hurt.