She Got Out Of Asia But It Didn't Help Much
Talk about good timing. Josephine Jimenez, senior portfolio manager of the Montgomery Emerging Markets Fund, pulled out of Southeast Asia on the eve of a currency crisis that threw the region's stock markets for a loop. Only 3% of the $1 billion fund's assets are now in Southeast Asia, down from 15% in June. But shareholders have taken a pummeling nonetheless. With emerging markets collapsing around the globe in concert with Asia's woes, Jimenez' fund, which owns shares in 200 companies from 32 countries, has plunged 21% since June 30. Jimenez, 43, a native of the Philippines, spoke by phone from her San Francisco headquarters with international finance editor Kerry Capell.
Q: After all the turmoil in emerging markets, are you still a believer?
A: Yes, because of demographics. Some 80% of the world's population resides in emerging markets, and 50% of those people are under age 19. This will lead to increased demand for consumer goods. In contrast, the population of Japan and the U.S.--the world's two largest economies--is aging, so there will be a significant slowdown in consumption.
Q: Your fund is up 6.5% since its inception in 1992. Is the emerging-markets correction affecting your strategy?
A: There has been no change. We're about 5% in cash, which is slightly more than our usual 3%. If anything, the recent events in Asia have only reinforced our belief that we have been pursuing the correct investment policy all along.
Q: What prompted you to get out of Asia before this past summer's devaluations?
A: We had been very worried about Southeast Asia and all the excesses in the system. You only had to travel to any one of the countries to notice all the unsold properties. Since banks and property companies are a major component of the stock markets there, we knew they were in trouble. And many companies are heavily indebted in foreign currencies. About two years ago, we started noticing that Korean companies were leveraged to the hilt. At the time, our analysts said Korea was a time bomb. We noticed the same thing in Thailand well before the July devaluation of its currency.
Q: Some 40% of the fund has been in Brazil, Mexico, and Russia for most of 1997. What attracts you to Brazil?
A: Brazilian equities are about 21% of the fund's holdings. Despite 20% real interest rates, Brazil has been growing about 6% in real terms. The market looks cheap at around eight times 1998 earnings. But the main reason is that we are encouraged by reforms. The telecom and electric [utility] industries are scheduled to be privatized by 1998. Almost one-third of our Brazilian exposure is in Brazil's phone company, Telebras. Around 10% of the population in Brazil currently has phones. Once Telebras is privatized and its long-distance network is divested to existing shareholders, some analysts estimate that its share price will double.
Q: Mexico makes up 13% of the fund. What's happening there?
A: We have been increasing our stake there since mid-1996 as industrial production has improved since the 1994 peso crisis. We like consumer-oriented plays such as the retailer CIFRA and Telefonos de Mexico. With the peso weakening to eight to the dollar, export-oriented industrial companies are more competitive. We like Alfa, an industrial play with interests in steel, auto parts, and petrochemicals.
Q: What do you like about Russia?
A: Russia is the best way to play China. Before China can produce more widgets, it needs energy, and the cheapest source of energy is in China's own backyard. No matter which measure you use to analyze the Russian oil sector, it scores very attractively on a global basis. Some 50% of our total exposure to Russia--and 4.5% of the entire fund--is in the blue-chip oil company Tatneft. When we first bought it, in December, 1996, it was $44 a share. Now, it is trading at $142.
Q: In fact, recent events in Asia have only reinforced your belief that oil will be increasingly valuable. Why?
A: In times of increased uncertainty such as these, people tend to run to the U.S. dollar. We think oil is a good dollar substitute: It trades in dollars, and all countries need it. That is why we like the oil and energy sectors in Russia and Mexico.