BOSTON ( TheStreet) -- Jerry Zhang, manager of the Evergreen Emerging Markets Growth Fund ( EMGAX), says telecommunications providers have room to grow in the developing world. He's bullish on China Mobile ( CHL). The $670 million fund has earned Morningstar's ( MORN) top rating, five stars. Brazil, Taiwan and South Korea make up more than a third of the fund, whose largest holding is Samsung Electronics. It's up 58% this year, beating the Morgan Stanley Capital International EAFE Index by 31 points. The fund has returned 19% annually, on average, in the past five years, beating 98% of its peers. Welcome to the TheStreet.com's "Fund Manager Five Spot," where America's top mutual fund managers give their best stock picks during a rapid-fire Q&A. Are you bullish or bearish? Zhang: Our goal is to participate in the long-term growth in emerging markets through rigorous pursuit of strong companies at compelling prices. With the sharp rally in emerging market stocks since March, finding companies that fit our criteria for both quality and valuation has become increasingly challenging. We are convinced that emerging markets companies are well positioned for sustainable growth over the long term, but for the near term we prefer to take a cautious stance. What is your top stock pick? Zhang: China Mobile is the largest wireless operator in the world with over half a billion subscribers. The shares have underperformed year-to-date because of concern over competition from two other major operators, which recently became fully integrated players with both fixed-line and wireless operations. We argue that China Mobile is much more resilient than people think. We estimate that about two-thirds of its subscribers are ring-fenced from competitors, including most of the high-end corporate market and the rural market. For corporate users, China Mobile has very competitive indoor coverage in all urban areas, while the rural market is essentially owned by China Mobile with 95% market share. It is very attractively valued for such as dominant franchise.
What is your best under-the-radar stock pick? Zhang: 104 Corp. operates the largest job-search Web site in Taiwan. It controls 80% to 90% of the domestic human-resources service market, with the next largest firm holding only 10% market share. It generates abundant free cash flow with strong profitability over the business cycle. We are looking for future growth from both the Taiwan market as well as its new venture in China that serves its Taiwanese clients operating in the mainland. The shares were neglected because of the cyclical downturn and the initial loss incurred in China. Its cash amounts to one-third of its market cap and is trading at single digit price-to-earnings ratio for next year. What's your favorite sector? Zhang: We like the emerging markets telecom sector. Telecom still has tremendous room for growth in the developing world. There are plenty of wireless penetration opportunities in many regions of Africa, India and rural China. Data applications are increasingly driving growth for wireless due to the limited fixed-line infrastructure. Other wireless applications such as money transfer are revolutionizing many industries in emerging markets. At the same time, investors have been focusing on cyclical recovery plays and paying little attention to the telecom sector, which presents a great opportunity for patient investors. Which sectors or stocks are you avoiding? Zhang: We are negative on the steel sector. The market has become used to the hyper growth in the Chinese steel market, which is increasingly unsustainable. China now has about 700 million ton annual steel capacity, higher than the next 10 countries combined, while its actual demand is about 500 million tons. China has overinvested in fixed assets over the years, consuming enormous amounts of steel and cement, but will have to readjust toward more consumption going forward. The massive overcapacity in China will become a big overhang for the entire sector, while the high valuation further undermines the investment case. -- Reported by Danielle Kost in Boston. Follow TheStreet.com on Twitter and become a fan on Facebook.