Once Antoine van Agtmael, the economist who coined the term “emerging markets”, had persuaded his colleagues at the International Finance Corporation (IFC) to rebrand the clunky descriptor “less-developed countries” with his snappier moniker, the next step was to see whether the private sector would buy into the new jargon – in every sense.
For the IFC, Templeton, Galbraith & Hansberger was a logical starting point to test their hunch. After all, Sir John Templeton, the fund’s managing partner, had already listed the first international equity closed-end fund on the New York Stock Exchange (NYSE). But when approached, Templeton baulked at the IFC’s idea of an open-ended emerging market fund, fearing the risk of massive redemptions in an asset class that was still overshadowed by the 1982 debt crisis.
Having rebuffed the IFC’s advances, Templeton, however, decided to forge ahead on his own – with a closed-end offering. The first task was to find a suitable fund manager. Enter Mark Mobius, a young fund manager working in Taipei, overseeing the NYSE-listed ROC Taiwan Investment Fund, whom Templeton had met some years before in Hong Kong.
Moving in
Mobius, an MIT development economics graduate, revelled in the challenge of launching the world’s first emerging market equity fund. He was quick to accept the offer, but with one key condition. “At that time, Templeton only had offices in Fort Lauderdale and St Petersburg, Florida, plus Nassau for tax purposes. I said to him: ‘If we are going to do this, we have to be in emerging markets; we have to open an office in Hong Kong,’” Mobius tells Emerging Markets.
So with a new base, $100 million from Merrill Lynch, and Chase appointed as custodial bank, Templeton Emerging Markets Fund was established and marketed to retail investors. The first years were tough, Mobius recalls, not only because of investor scepticism. Many of today’s major emerging markets were not even open for business, with foreign exchange controls that made non-resident participation in their stock exchanges impossible. The Iron Curtain remained firmly closed, South Africa was suffering under apartheid, and the Andean Pact was designed expressly to keep foreign investment out.
“We had Mexico and four Asian markets, and that was it. We had to start opening these countries; attitudes had to change,” says Mobius.
Not only attitudes in emerging markets had to change. Chase, as the bank responsible for the safekeeping of assets, was understandably cautious about the political and legal risks in each new country that Templeton entered. Mobius was obliged to seek clearance from the board repeatedly.
Investment decisions were equally complicated. Argentina and Brazil had inflation rates of more than 4,000%, which made stock valuations partly a matter of guesswork. Yet, a meticulous approach revealed certain companies trading at less than their book value, giving Mobius the investment rationale he needed.
He also found that more than financial assets could be at risk. On an early company visit to Venezuela, he passed through emigration controls on his way out, but his colleague from the Hong Kong office failed to show up for another half hour. “When he finally got through, I asked him what had happened, and he said they had demanded $100. So I asked: ‘What did you do?’ He replied: ‘I bargained them down to $20!’”
If Templeton was known for keeping costs to a minimum, Franklin Resources, which bought the firm in October 1992, had a much larger sales budget. “It was like adding a rocket to the fund,” recalls Mobius. By 1996, an office was set up in Moscow after the fall of the Soviet bloc, and total assets under Mobius’s command had reached a peak of $15 billion.
Templeton training
Then the Asia crisis intervened. Assets under management almost halved, to $8 billion, but Mobius says the experience did not change his fundamental investment strategy. “It just reinforced what John Templeton had drilled into us all along – value, value, value.” In fact, he found the years after the crash, when the technology bubble emerged, a more profound challenge for his investment philosophy.
“We thought tech stocks looked expensive, so we weren’t heavily invested in them. But they kept going up, and people were asking why we were underperforming. Of course, when the bubble burst, we didn’t look so bad after all.”
Part of the difficulty, according to Mobius, was the emergence of benchmark indices such as the MSCI, “the monkey on the shoulder”, which sometimes encouraged short-term thinking. Templeton funds are sold with investment horizons of at least five years.
Although the rise of hedge funds designed to earn quicker profits may have become a dominant theme in emerging markets, Templeton is certainly not out of fashion. Indeed, as ever more markets open up, the establishment of numerous regional and individual country funds has taken the total assets under Mobius’s management far beyond their 1996 peak, to around $40 billion.
This performance allows Mobius to take a calm view on the current market volatility, which he regards as symbolic of the remarkable progress in his own asset class. “A decade ago, everyone was asking who had emerging markets exposure on their balance sheets. Today, we’re asking which emerging market banks have US housing exposure,” he jokes.
The veteran money manager notes how times have changed. Emerging markets now want a serious dialogue on the vexed question of financial governance, rather than the one-way rhetoric coming from the US in previous years. Mobius considers the return of economic nationalism, including the apparent new-model Andean Pact being carved out by Hugo Chavez, as “one of the big dangers we face”. But he also recognizes that it stems partly from an inevitable reaction to recent American financial practices.
“We have private equity funds who don’t just want to invest, they want to control companies. We also have hedge funds with heavy leverage that want to make money so fast, they can cause great volatility in emerging economies as they enter and exit. This whole style is more confrontational.”
He believes that investors will need to consider how to reconcile a good rate of return with adding something to the local economy. With its more passive strategy and longer investment horizon, Mobius naturally argues that the conventional equity fund just might be the vehicle to achieve this balance.
This profile is one in a series of twenty, published in a special commemorative edition to mark the 20th birthday of Emerging Markets newspaper. The profiles canvass twenty of the figures who have had the most impact on the rise of the emerging markets over the past two decades.