Eaton Vance's Rees-Moog Sees Tremendous Values in Emerging Markets

When one travels to distant locales, it's advisable to secure the services of a trusty and knowledgeable guide.

The same holds true for investing in emerging markets, where one may encounter such potential pitfalls as problematic accounting, banks laden with bad debt, concerns about terrorism and economic woes (this is overseas we're discussing, right?). You would have to travel far to find a surer guide than Jacob Rees-Moog, manager of the (EMEMX)Eaton Vance Emerging Markets fund.

Since Rees-Moog assumed the helm of the fund in May 2000, the value-minded Briton has turned in a most impressive performance. The fund's 7.28% one-year return puts it in the top 3% of all emerging-markets funds, according to Morningstar. Its three-year annualized return of negative 5.87% ranks among the top 13%.

Rees-Moog makes a convincing argument that emerging markets offer extremely cheap buying opportunities, thanks to reforms enacted after the global crises of 1997 and 1998 as well as burgeoning middle classes within the borders. How cheap? He is finding many stocks with price-to-earnings ratios below 10 and dividends near 5%.

Rees-Moog takes readers around the investing world in 10 Questions -- from Russian oil companies and South African mining stocks to Brazilian tobacco makers and Chinese insurance outfits. Armed with characteristic British wit and an encyclopedic knowledge of emerging-market economies, we think you'll find it a most valuable trip.

Jacob Rees-Moog Eaton Vance Emerging Markets Fund

Tenure: Manager since May 1, 2000

Assets: $18 million

Three-Year Average Annual Return: -5.69% (Top 13% of Peers)*

Top Three Holdings: Harmony Gold Mining (S. Africa), Gold Fields (S. Africa), Sindoricoh (S. Korea)**

Fund Information: Web site or 1-800-225-6265

*Performance through 11/30/2002. **As of 9/30/2002. Source: Morningstar, Eaton Vance

1. What is the outlook for emerging markets in the next 12 to 18 months?

It's a mixed picture. Emerging markets obviously have significant dependence on the major markets. What we're seeing is that domestic markets are strong, but that exports to the U.S. and Europe are weak. We are more invested in domestic consumer-based stocks rather than export-driven businesses.

Where we're positive and why we're very optimistic about emerging markets at the moment is on valuation grounds. I'm seeing many stocks with P/E ratios under 10 and dividend yields approaching 5%, which is almost always a good basis on which to invest.

Why are valuations so low?

The emerging markets went through a crisis in 1997-1998 and it was across the board -- Russia, the Far East, Latin America as well. Since then, there's been quite a lot of consolidation and reorganization, the banking systems have been reformed, credit has improved dramatically.

We've seen extremely low levels of earnings bounce back surprisingly quickly. I wouldn't categorize it as fundamental growth, rather a rebound after a couple of years of extremely difficult trading. In a way, we're back on trend.

That's one side of the equation. On the other side, there is domestic growth. Emerging markets have large consumer markets within them where the people are getting steadily richer -- a growing middle class, if you will.