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A <I>Mea Culpa</I> on Mobius

We had our doubts, but the Templeton emerging markets manager's strategy has been vindicated.
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We were merciless on Mark Mobius. And we were wrong.

Through 1998,

published several stories that lambasted the investment strategy of the high-profile

Franklin Templeton

emerging markets manager.

Templeton's international funds "are in an ugly period of underperformance from which they may not emerge for several years," we wrote last June.

But, against our expectations, his brash bets have paid off handsomely, and Templeton's flagship emerging markets fund, the

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Templeton Developing Markets Trust, has sailed up the performance tables after some testing months near the bottom. Its 1998 returns ranked 23rd among 185 emerging market funds, according to



For most of last year, knocking Mobius seemed the right thing to do (see our story last

January). Returns of the $2.7 billion Developing Markets fund were deteriorating fast, causing it to tumble against its peers. Equally serious, last year's troubles sparked big outflows of assets -- an estimated $455 million from January to November last year, according to Lipper.

Developing Markets' descent was chiefly due to Mobius' heavy buying of bombed-out Asian stocks. When he bought them, Mobius thought they were done dropping -- but many just kept on diving after he owned them.

"We got in too early," admits Mobius, speaking on a cellular phone as he checked into the

Shangri-La Hotel

in Hong Kong. "At times we had second thoughts. It was like being on a rock that was rolling down a hill."

Being early into Asia initially took a gruesome toll on Mobius' numbers. Developing Markets ranked 122 out of 152 emerging markets funds, with a 50.77%


return for the year ending Sept. 30, 1998 -- the point at which most emerging equity markets bottomed.

We assumed that emerging equity markets would stay in the doldrums for a lot longer than they actually did, which would have kept Mobius down.

But it's now clear he was excellently placed for the emerging market recoveries that started in October, not only in Asia, but also in Latin America. Consequently, Developing Markets ended '98 with a minus 18.72% return, which, while bad in itself, compares very well with the negative 27.51% return for the benchmark

Morgan Stanley Capital International Emerging Markets Free Index


Over the five years through the end of 1998, Developing Markets is the No. 1 emerging markets fund out of an 18-strong peer group, with an annualized return of minus 3.73%. Over three years, it's 10 out of 89 with an annualized return of minus 3.38%.

Clearly, the old Templeton trick -- boldly going into markets other investors have deserted and selling out of those that are gripped in bullish mania -- still works well. But Mobius did not do well just because he went where others wouldn't. He also had the sense to steer Developing Markets well clear of disaster areas like Russia and China.

What Next?

Another of Mobius' tricks was to have a large balance of cash available to spend on cheap-looking stocks. In June of last year, he had an estimated $750 million on hand. He then spent all of that in the following months and says he is now fully invested.

His biggest country allocation is now Brazil, where Developing Markets had 11.4% of its assets last June (the most recent date for which country data is available). Brazil is definitely

not out of the woods. So will shareholders in Developing Markets face another gut-wrenching ride if the country does go through a possible devaluation crisis?

Mobius is remarkably unfazed by the prospect of a Brazilian currency crisis. Yes, devaluation would cause the equity market to plunge. But, he says, over the long run, it may be good for the country, as it could boost exports. "It'd be nice if the Brazilians held the line," says Mobius. "But it'd also be nice if the country became an export powerhouse."

Other countries where Mobius has a lot of money are Turkey, Mexico, Hong Kong and Singapore. He stresses, however, that the recoveries he expects in emerging markets will not be smooth and uninterrupted. "There'll be corrections along the way," he says. Mobius says he thrives in crises. When countries hit the wall, he finds it much easier to find good companies that have become deeply undervalued.

Lessons Learned

Mobius claims he has learned some important lessons from the emerging markets crisis that erupted at the beginning of 1997. (The

MSCI Emerging Markets Free Index

is down 33% since then.)

In particular, he's now paying a lot more attention to the political conditions in emerging markets. Investors lost their shirts in countries like Russia and Malaysia, where the countries' leaders have paid little attention to the rule of law. "One lesson that comes through is that we've got to look at the people behind these countries," he says.

Still, this new wariness does not mean Mobius will completely shun a troubled country if he can find some good value investments there. Take Russia. For the New York Stock Exchange-listed, closed-end fund

Templeton Russia


, he's buying dollar-denominated eurobonds, even though the government has defaulted on some of its other debt obligations.

Why? Because Mobius thinks they're cheap (they currently trade between 24 cents and 36 cents to the dollar, depending on maturity). He believes the government will do all it can to keep current on its eurobonds so it can one day issue more of them to raise dollars from foreign bond buyers.

The Peripatetic Bachelor

How much longer will Mobius stay with Templeton? After all, he's 62, spends most of the year on the road and averages five hours of sleep a night. Due to his globe-trotting schedule, he admits that he doesn't really live anywhere in particular. (He's also unmarried.) But he says, "I have no thoughts of giving up. The more experience you have in this business the better you get."

John Templeton, former head of Templeton who pioneered the firm's aggressive overseas investing in the 1950s, stopped actively managing money when he was 80, Mobius points out. And Templeton, now 86, is still busy with his charities.

Like his onetime boss, Mobius says, "I'll go on investing beyond 65."

And we'll go on writing about him -- but with a little more respect.

Postscript: Templeton Vietnam Fund Suit

Last year, we also reported on a class-action lawsuit charging breaches of securities laws and fiduciary trust brought by investors in the

Templeton Vietnam Fund


, a closed-end fund managed by Mobius.

Mobius, several other Templeton employees and directors of the fund were named as defendants in the suit.

For an account of the particulars of the case, see stories published in

March and


Last year, Templeton applied to have the case dismissed. A judge at the federal court in the southern district of Florida is weighing whether to let the case progress.

Lawyers at Seattle-based

Hagens & Berman

, which is representing the plaintiffs, will begin deposing Templeton personnel if the case is not dismissed, says Karl Barth, a lawyer at the firm. He aims to obtain sworn testimony from Mobius at the end of this year. The actual trial probably would take place in 2000, says Barth.

"We don't think the lawsuit has any merit, and we will oppose it vigorously," says a Templeton spokeswoman.