January 2002, Volume II, Issue 1
George Cole Scott, Editor

Sir John Templeton and Dr. Mark Mobius on
Emerging Markets

Sir John Templeton

Dr. J. Mark Mobius

Prior to learning about the proposed mergers of several Templeton funds, which are a part of a worldwide consolidation of the mutual fund and closed-end fund industry, we telephoned Mark Mobius in Bangkok. During this interview, I made several references to Sir John Templeton, whom I have also had the pleasure of visiting several times at his home and office on Lyford Cay, Nassau. I first met Sir John in New York in 1989 and have stayed in touch with him over the years.

On January 10, I telephoned Sir John, who is still interested in investments even though he sold his funds to The Franklin Group in 1992. He now spends most of his time managing several Templeton foundations and doing other charitable work as well as publishing books related to this activity. He is realistic about his age and once told me that he has to work twice as hard now"because there is little time left". He is somewhere near his 88th year now, but you wouldn't know it when you speak to him. He still works seven days a week, has just published another spiritual book and is too busy to think about retiring as long as he can keep up his health. It is always a delight to talk to this remarkable individual; I feel lucky to be able to do so. Sir John is always very courteous to everyone he meets and has the special ability to make everyone he meets feel that they are the most important person in the world.

Scott: Good morning Sir John. How are you?

Templeton: I have had a hip replacement recently.

Scott: Oh, I am sorry to hear that. Are you getting along all right?  

Templeton: I am doing the best I can.

Scott: You always do and I have always admired your optimism. The reason I called is because I have recently completed an extensive interview with Mark Mobius about the emerging markets in which I made several references to you and your investment philosophy. He mentioned you were interested in a Thai Fund. Did you find the one you wanted?

Templeton: Yes, there is a management company in Thailand, which has had a successful record with a small fund. I made a modest investment in it. Thailand is one of the places where stocks are cheaper in relation to earnings, assets and dividends than those in other nations.

Scott: Dr. Mobius was in Bangkok when I spoke to him. He said he "senses a reawakening" in the emerging markets after several years of decline. Do you agree?

Templeton: All over the world stocks are selling for more than their worth. There are some differences in some places. I think, leaving out Japan, stocks in the Far East are less inflated than American stocks.

Scott: That's interesting and your philosophy has been to find the most undervalued stocks anywhere in the world. I recall some of your rules of successful investing, as you explained in the book, "Global Investing", by Norman Berryessa and Professor Eric Kirzner. (Dow Jones-Irwin, 1988)  The rule that really interests me in my work as a professional investor is your Rule of Importance of Price. That is number one isn't it?

Templeton: Yes, I call it the rule of maximum pessimism. That means that share prices never go down to a ridiculously low level except when almost everybody is trying to sell. That is the only factor that affects a share price. If you are wise, you will look to see when share prices are the most depressed, and, over my fifty years, I always rely on estimates of  underlying earnings projected into the future. I will buy stocks anywhere in the world where the price is the lowest in relation to what the company is likely to earn in the long run. I believe that is a wise method, but I am now too busy to do it as thoroughly as during my investment career. I now hire mutual funds, which pay very high salaries to their managers to do it for me.

Scott: I then referred to my 87 year-old mother, Anne Martindell, whom he had met on our last visit to Nassau. He was fascinated that she had gone back to college after retiring from her career as a politician and diplomat. I told him she will be graduating from Smith College in May with a B.A. and an honorary degree.

Templeton: His voice brightened:  What a wonderful thing to do! Didn't she go to college when she was young?

Scott: Her father took her out after a year because he didn't think women should be educated. She has been determined ever since to finish college.

Templeton: She and I are alike in another way. When I was at Yale in the 1930s, my father said to me "Because of this Depression, I can't even give you one dollar to go back to college". This seemed like a terrible tragedy at the time, so I borrowed money from an uncle and got back to Yale. The administration helped me find work so I worked as many as three jobs at a time and tried to get scholarships. In those days, they were given for high grades. I wound-up being the top scholar in the class, which I never would have done if I hadn't had the necessity to work. It was good for me...often in many ways things we think are a tragedy at the time give us a lesson that is very helpful in real life.

Scott: That experience got you into your life's work. Perhaps this was the beginning of your rule that says investing is hard work and that short cuts produce second-class results. Are you still very involved in your foundations?

Templeton: Yes, that is my main activity. Ninety percent (90%) of my time is work for the several Templeton Foundations. We don't do any programs ourselves, but we make donations to groups of research scientists who are trying to discover more about spiritual subjects. We think is very important that no religion we have found is enthusiastic or devoting much time to discoveries. Religions have, therefore, become old fashioned, obsolete and neglected all over the world. We want the same enthusiasm for new things in religion as you find in electronics or medicine.

Scott: I wish I had more time to talk to you about these activities, but this is an investment newsletter. Thank you for your time, and it has been delightful to be able to talk to you again. [He wanted a copy of the newsletter so I said I would e-mail him it to him when it is published.]

Press Release:
Templeton Closed-End Funds Plan Mergers, Reorganizations

Ft. Lauderdale, Florida, January 4,2002. The Boards of Directors of Templeton Emerging Markets Appreciation Fund (TEA) and Templeton Emerging Markets Fund (EMF) today approved a proposal providing for the reorganization of TEA into EMF. The expected tax-free exchange for shares of EMF and the distribution of shares TEA to shareholders is part of the liquidation and dissolution of TEA. The transaction is subject to the approval of shareholders of TEA and EMF respectively and, if approved, shares will be exchanged based on the respective net asset values of TEA and EMF. TEA currently has assets of approximately $48 million whereas EMF currently has assets of approximately $258 million. The completion of the merger is expected to occur by the summer of 2002.

Press Release:
Templeton Dragon Fund Announces Merger

The Board of Directors of Templeton Vietnam & Southeast Asia Fund, Inc (TVF) and Templeton Dragon Fund, Inc. (TDF) approved a proposal providing for the reorganization of Vietnam Fund into Dragon Fund. Under the deal, Dragon Fund would acquire substantially all the assets of Vietnam Fund in exchange for shares of Dragon Fund, which would be distributed to Vietnam fund's shareholders. The tax-free deal is subject to approval from both fund's shareholders and is expected to take place in the second quarter of 2002. Prior to the reorganization, TDF's Board has approved a series of tender offers of up to 10% of Dragon Fund's shares during the next 24 months at not less than 90% of net asset value regardless of whether the reorganization of Vietnam Fund takes place. As of January 4, Vietnam Fund had $37 million in assets while Dragon Fund had $439 million in assets. The Investment Advisor for all the above funds is Templeton Asset Management Ltd., a unit of Franklin Resources  (BEN). The portfolio manager for these funds is J. Mark Mobius.

The advisor for Templeton Asset Management also announced that it wants to merge the two bond funds, Templeton Global Income Fund (GIM) and Templeton Global Income Trust (TGG), subject to shareholder approval. For more information on the above mergers, please contact Franklin Templeton Investments at 800-342-5236 or your financial adviser. Members of the media should contact Franklin Templeton Corporate Communications at 650-312-3395.

J. Mark Mobius on the Emerging Markets

Mark Mobius joined Templeton in 1987 as president of Templeton Emerging Markets Fund in Hong Kong. He currently directs the analysts based in Templeton’s eleven emerging markets offices and manages the emerging markets portfolios. Dr. Mobius has spent over 30 years working in Asia and other parts of the emerging markets world. As a result of his experience, in 1999 Dr. Mobius was appointed joint chairman of the World Bank and OECD’s (Organization for Economic Cooperation and Development) Global Corporate Governance Forum’s Investor Responsibility Taskforce.

In 1999, Dr. Mobius was named one of the “Ten Top Money Managers of the 20th Century” in a survey by the Carson Group, a leading global capital markets intelligence-consulting firm. For the second year in a row, Dr. Mobius was named the number one global emerging market fund manager in the 1998 Reuters Survey. CNBC named him “1994 First in Business Money Manager of the Year. Morningstar in the U.S. awarded Mobius the “Closed-End Fund Manager of the Year” for 1993. In 1992, Dr. Mobius was named “Investment Trust Manager of the Year” by The Sunday Telegraph in the United Kingdom.

Prior to joining Templeton, from 1983 to 1986 he was president of International Investment Trust Company Ltd.- Taiwan’s first and largest investment management firm. Prior to that, Dr. Mobius served as a director at Vickers de Costa, an international securities firm. Before joining Vickers, he operated hid own consulting firm in Hong Kong for ten years and was a research scientist for Monsanto Overseas Enterprises Company in Hong Kong and the American Institute for Research in Korea and Thailand.

Dr. Mobius holds bachelor and masters degrees from Boston University and he holds a Ph.D in economics and political science from the Massachusetts Institute of Technology. He also studied at the University of Wisconsin, University of New Mexico, and Kyoto University in Japan. Dr. Mobius is the author of the books The Investor’s Guide to Emerging Markets, and Mobius on Emerging Markets and Passport to Profits.

We telephoned Dr. Mobius on December 20, 2001.

Scott: It is good to talk to you again. You usually prefer to be called after a late dinner.

Mobius: That is usually the best time. We finish our interviews and company visits about six. Then we go back to the hotel for our e-mails. After working-out at the health club, we usually have dinner meetings with brokers around ten o'clock. Afterwards, I go back to the hotel to do more e-mails and get to bed by 1:00 AM. I am up by 7:00 AM to start over again.

Scott: A long day, but you are wise to keep-up your health with that schedule. I recall first meeting you in Chicago in 1993 when Morningstar awarded you the Closed-End Fund Man of the Year. I have also reached you in various places such as Miami and Vancouver and one time while you were walking down the street late one night in Buenos Aires. My last interview with you was in August 1996 for Jim Libera's "Closed-End Country Fund Report" after I sold the original "Scott Letter" subscriber list to him. I telephoned you in Singapore on the day of the Russian election and we talked to you and your associates at a meeting which starting at midnight, The last time I saw you was when you were kind enough to invite me and my Russian friend to breakfast in Hong Kong on July 4, 1997, after the handover to China (and the currency devaluation in Thailand). This followed my first visit to Mainland China, to Shanghai and then to Guangzhou (Canton), southeast of Hong Kong by train.

As we are Closed-End Fund Advisors, we would like to discuss with you some of the closed-end fund issues that interest our sophisticated group of investors. They also want to know more about how you use the Templeton philosophy.

First, where you were on September 11?

Mobius: I was in a small countryside restaurant in Romania. The television was turned on when the disaster came on. I got on the phone to our people. We had a lot of cash in the portfolios; we increased it some and then we started investing, finding some terrific bargains.

Scott: That fits your philosophy. I see your logo: "Value--Patience--Bottom-up". Is this the best way to summarize it?

Mobius: Yes, that is really it in a nutshell. We look for value, good stocks with good managements. Nowadays, we are emphasizing corporate governance a lot more than ever.

We look for companies that treat shareholders fairly and keep their interests in mind, something critical for us. The second, patience, is important as it sometimes takes time for things to come to fruition. We have found over the years that there is a growing emphasis on short-term indexing as so many investors are looking for the quick buck. We try to resist that as best we can.

Scott: What do you think of the Exchange-Traded Funds, ETFs, which are the new way to invest in both domestic and foreign indices?

Mobius: In theory, they sound great! In practice, I am not so sure, simply because they are trying to ape an index which includes a lot of garbage that shouldn't be there. That's a problem. I think exchange-traded funds at the end of the day will not outperform well-managed funds. I know there is a big debate about ETFs, but I think that is the case.

Scott: I have been to conferences on ETFs. Some see them as replacing mutual funds. The $79 billion in ETFs, as of November, is still tiny compared to $6.9 trillion in mutual funds. We think they have value for some investors who want to trade and others who want to hedge, but we are not using them for our clients because we think they are too trading-oriented for those of us taking a long-term view. They also do not trade at a discount.

Mobius: I agree. They are really difficult to use.

Scott: I notice in your biography that in 1999 you were joint Chairman of the World Bank and OECD’s Global Corporate Governance Forum's Investor Responsibility Taskforce. Is this one of your new responsibilities?

Mobius: Yes, the management of companies and their treatment of minority shareholders is very, very important. With the recent economic downturns, we recognized that there is a lot of very bad corporate governance in companies we invest in. We emphasize this wherever we go all over the world. As a result, I have been invited to sit on the boards of emerging market companies because they know they have to do something. The situation is improving, but it will take time. For example, some of the Russian companies have really taken this to heart as Russia was the most flagrant violator and now they are trying to make amends because they recognize that unless they change they will not become global companies. That is also true in all other emerging markets. Corporate governance issues are not restricted to the emerging markets--but in the emerging markets they are much more acute. It is absolutely necessary that all of us in the emerging markets take the time to look at these issues and pay attention because our future is at stake here. Unless we are able to solve corporate governance problems, we all will be in trouble. Corporate governance in the U.S. has been excellent because our livelihood depends upon the confidence of our investors. If we lose this, we are out of business. The self-regulating industry in the U.S. should be followed by others around the world.

Scott: How do you think the closed-end fund format is best suited to investing in emerging markets?

Mobius: The big advantage is that a closed-end fund structure gives the manager a chance to go into illiquid stocks without worrying about redemptions.

Scott: Yes, that is true. We also like the discounts, a prime advantage closed-end funds have over mutual funds. I follow the whole universe and now see more tender offers by funds for shares when there is a certain level of discount. After many years of resistance, we see an acceleration of buy-ins lately when the discount reaches a certain level. Share purchases by funds do reduce the size of the fund and raise the expense ratio somewhat, but they also raise the net asset value and put a floor under the price of the stock, something very important in the down markets we have seen lately. This is one of several reasons that closed-end fund discounts narrowed in the last two years, raising performance. One of my prime activities has been to convince investors that this is the value way to invest in a diversified portfolio. There still are some investors who don't understand that the leverage of the discount increases returns. A great example of how this has worked well is General American Investors, which, in a repurchase program in the year 2000, was able to raise their net asset value significantly in a down market.

Since 1996, I have been a consultant to a number of funds on this and other issues. We discuss this and related topics at the ICI Closed-End Fund Committee and fund directors conferences.

If the mergers of your equity funds are approved, the closed-end funds you will be managing will be the Templeton Emerging Markets Fund, The Templeton Dragon Fund, Templeton China World Fund and the Russia Fund. Could you tell us something about each of these funds?

Mobius: Templeton Emerging Markets Fund (EMF: NYSE)  is the largest and oldest (1987) of these funds (assets approximately $158 million) and is the pioneer of emerging markets funds. EMF owns a portfolio of equity securities of countries with "emerging" economies. EMF originally could only invest in five countries; but it now covers nearly every emerging market. (The definition of an emerging market is set by World Bank per capita income data, according to Dr. Mobius). Over the years, EMF has done very well despite ups and downs and many problems such as currency devaluations. We have a good following and are very happy with this fund. We are authorized to buy-in shares but have done very little with it.

(The average annual total return of EMF, based on changes in net asset value for the ten-year period ending August 31, 2001 was +8.19%; and in the year 2001, the net asset value of EMF declined -21.55%, according to the August 31,2001 annual report. Since then, the fund's net asset value has increased about 25%, recovering most of the decline).

Largest Country Allocation as of November 30, 2001
1.		South Africa	13.7%
2.		Taiwan	8.1%
3.		Hong Kong	8.0%
4.		South Korea	6.7%
5.		Mexico	6.6%
7.		China	6.4%
7.		Turkey	6.2%
8.		Brazil	5.4%
9.		Thailand	4.9%
10.		Singapore	4.4%

The expense ratio in 2001 was 1.67% versus 1.68% in 2000.
The portfolio turnover rate was 63.64% versus 81.66% in 2000.

Templeton China World (TCH:NYSE): China World was started in the U.S. and was directed at the Chinese market, although we widened its scope to have flexibility to include countries in Southeast Asia that would benefit from the growth in China.

Templeton Dragon (TDF:NYSE) is larger than its sister fund, China World and is really a mirror of the other fund. It was designed for the benefit of Japanese investors. They saw the China World Fund and were interested in getting involved. So we did it for them and it is now widely held.

Templeton Emerging Markets Appreciation Fund (TEA:NYSE): The concept here was to have a fund that combines equity and emerging markets debt. I manage half of it and the other half is done by our bond people in California. It has done very well and the fixed income component stabilizes the fund so you have a much more consistent performance.

Templeton Russia Fund (TRF:NYSE): This is the only closed-end New York-listed Russian fund. It is a way for people to get exposure to the Russian Market. We also invest in some of the Eastern European countries that are exposed to Russia. For instance, we hold a Finnish company that is the largest beer producer in Russia. TRF sells at a premium to its net asset value because of its high performance in 2001 due to a sharp rise in the Russian stock market.

Scott:  The largest country allocation for EMF is South Africa. Are you still bullish on this region?

Mobius: Yes, in spite of the fact that the rand has weakened. The currency speculators realized that the central bank in Pretoria is not going to support the currency even if they wanted to. They don't have the foreign exchange to do so. They are trying the same thing that happened in Thailand. The difference is that South Africa has no major foreign exchange loans outstanding so there is no panic about companies with overseas operations meeting their U.S. dollar obligations. Therefore, this will not be a repeat of what happened in Thailand in 1997. We may put more money in South Africa because the currency has become one of the most undervalued around. It is the only place in the world where you can buy a McDonalds' hamburger for less than one dollar. By this "McDonald's Index", South Africa is a very cheap place to invest.

Scott: What about China and the WTO?

Mobius: China is becoming such a major manufacturing source in the world that, if the rest of the world doesn't watch out, China will hollow-out all the world's manufacturing. They have an  enormous local market, the lowest cost in the world and a highly skilled, precise labor force which is willing to work hard. They also have capital. A 7% growth rate is incredible for country that size. China now has more mobile phone users than the United States and will be first before long. WTO entry means China will have to move even faster on reforms, particularly on the state enterprises. I am very optimistic about China, and we want to be there.

Scott: We are more optimistic on China than other parts of Asia. Is your legal residence now in Singapore?

Mobius: No, I don't live anywhere as I always stay in hotels because of my travel schedule. I am constantly traveling, one week here and one week there. I stay in hotels in Hong Kong. I have a residence in Singapore, an apartment in Kuala Lumpur, Malaysia, and a house in Hong Kong We have operations in Shanghai, in South Korea, India, Turkey, Poland, Moscow, South Africa, Argentina, and Brazil so I have got to be everywhere.

Scott: There must be few people in the world who travel as much as you. Do you use a satellite telephone?

Mobius: I use a regular GSM phone, like they use in Europe, Asia and Japan. The satellite phones are too expensive, and I can do the same thing with a cell phone which I can get at every airport.

Scott: That is an example of how you keep costs low for shareholders.

A final question, with the collapse of the government in Argentina, does this represent bargain hunting time for you again?

Mobius: I will be telephoning Argentina to see what's available and if we should be going in.

Scott: I know that Sir John Templeton's philosophy is that you should be buying when everyone is desperately selling. That is “The Templeton Way”. We wish you the best of luck. Thank you for giving us so much of your valuable time.

The clients of Closed-End Fund Advisors hold shares of Templeton Emerging Markets Fund (EMF) and Templeton Dragon Fund. George Cole Scott and his family hold shares in EMF. We took advantage of market weakness in December to add to client holdings of EMF at prices between $7.30 and $7.90. The price on January 16 was $8.33. We plan to vote for the proposed mergers, which should enable Dr. Mobius and his associates to manage these funds more efficiently.

Note: None of the information contained herein should be construed as an offer to buy or sell securities or as recommendations. Performance results shown should under no circumstances be construed as an indication of future performance. Data, while obtained from sources we believe is reliable, cannot be guaranteed.

Use or reproduction of any of The Scott Letter Online requires written permission from Closed-End Fund Advisors, Inc. The Scott Letter is copyrighted to Closed-End Fund Advisors. All Rights Reserved.