How to Invest During an Economic Crisis

Those who say "this time it's different" in describing the current financial turmoil could use a reminder that, a mere decade ago, a surprisingly similar situation existed.

A good lesson for investors to bear in mind is that those who kept faith in the markets during the crisis were extremely well rewarded.

Assuming the U.S. economy recovers from its current lapse, as it always has in the past, similar rewards are possible for those who brave the prevailing negativity and stick with the long side of the stock market.

The current crisis bears remarkable similarities to the Asian economic crash that started 11 years ago this month -- first a devaluation of the Thai currency, then a major collapse of markets and currencies throughout East Asia. Yet, those who bought mutual funds with holdings in that region 10 years ago, when the outlook in that region seemed bleak, experienced explosive growth over the subsequent decade.

Funds that have quadrupled or better in the 10 years since the depths of the "Asian contagion" are summarized in the accompanying table. A second list shows some beaten down funds that optimists might consider in these uncertain financial times.

The current U.S. slump is remarkably similar in many ways to the Asian collapse that began in 1997, as can be seen from these descriptions of the Asian situation by the Federal Reserve Bank of San Francisco and the U.S. Congressional Research Service:

It was an "unprecedented financial crisis" caused in part by a "classic financial panic."

"Disruptions in bank and borrower balance sheets have led to wide bankruptcies and interruption of credit flows."

The economic shocks were "what some describe as 'runs' on financial systems and currencies."

A major weakness was "lack of incentives for effective risk management."

The crisis was "created by implicit or explicit government guarantees against failure."

"Events were accompanied by pressures in the foreign exchange market."

A major political figure attacked "rogue speculators" as contributing to the problems.

The collapse of a major investment firm exacerbated the crisis.

Short-term debt held by financial firms was converted to government-backed loans in an effort to remedy their problems.

Those who braved the uncertainty of the Asian turmoil of a decade ago and acquired mutual funds focusing on that region have been handsomely rewarded. Of 66 Asian and Pacific region funds with performance histories of at least 10 years tracked by TheStreet.com Ratings, the average fund has nearly quadrupled over the past years, up a cumulative 277.50% for the period. That's more than eight times the aggregate return of 32.9% for the S&P 500 total-return index over the period.

On an annualized basis, the return for the average Asia/Pacific region fund over the decade since the East Asian crash has been 12.7% vs. 2.88% for the S&P 500 total return benchmark.

The accompanying table shows a sampling of funds invested in the hardest-hit East Asian countries of Thailand, Indonesia, Korea, Malaysia, Taiwan, Singapore and Hong Kong.

Besides returns from rebounding stock prices, U.S. investors who braved the Asian contagion were rewarded when the Asian currencies recovered from panic levels and then steadily appreciated against the greenback over the past decade.

MANY INVESTORS WHO BRAVED THE "ASIAN CONTAGION" 10 YEARS AGO WERE RICHLY REWARDED
FUND NAME	TICKER	TheStreet.com RATINGS GRADE	TYPE OF FUND	10-YR. ANN'L TOTAL RET'N (%)	10-YR. CUMULATIVE TOTAL RET'N (%)
Matthews Korea Fund	MAKOX	C	Open-End	25.73	886.88
Korea Fund	KF	D	Closed-End	23.09	698.25
Templeton Dragon Fund	TDF	B-	Closed-End	20.39	539.62
Matthews Pacific Tiger Fund	MAPTX	B-	Open-End	20.12	525.65
DFA Asia Pacif Smal Comp Port	DFRSX	A-	Open-End	20.02	519.96
Greater China Fund	GCH	C-	Closed-End	19.91	514.32
Templeton China World A	TCWAX	B-	Open-End	19.31	484.53
Matthews Asian Growth & Income Fd	MACSX	A	Open-End	18.45	443.67
Fidelity Southeast Asia Fund	FSEAX	C+	Open-End	17.81	414.83
Allianz NACM Pacific Rim A	PPRAX	B	Open-End	17.35	395.19
Asia Pacific Fund	APB	C+	Closed-End	16.71	368.92
AllianceBern Greater China 97 A	GCHAX	C+	Open-End	16.40	356.61
Guinness Atkinson China & HK Fund	ICHKX	C+	Open-End	15.84	335.00
TCW Asia Pacific Equities I	TGAPX	C+	Open-End	15.81	333.80
T. Rowe Price New Asia Fd	PRASX	C	Open-End	15.52	323.21
Pacific Capital New Asia Gr A	PNAAX	B	Open-End	15.21	312.12
iShares MSCI Malaysia	EWM	B+	ETF	15.11	308.45
Korea Equity Fund	KEF	C+	Closed-End	14.92	301.72
Avg. of 66 Asian & Asia/Pacific Funds *				12.67	277.49
S&P 500 Total Return Index				2.88	32.85
* Only selected funds displayed in table from 66 Asian & Asian/Pacific funds with 10 years of performance history. Source: TheStreet.com Ratings - Data as of 6/30/2007. For an explanation of our ratings, click here.