The Scott Letter: Closed-End Fund Report©
Published by Closed-End Fund Advisors, Inc.

February 2003, Volume III, Issue 2
George Cole Scott, Editor

Interview with Mark Mobius of Franklin Templeton Investments

The rule of maximum pessimism means that share prices never go down to a ridiculously low level, except when everybody is trying to sell. That is the only factor that affects the share price. So, if you are wise, you will look to see when share prices are the most depressed. I buy stocks anywhere in the world in relation to what the companies are likely to earn in the long run. — Sir John Templeton

J. Mark Mobius, Ph.D.

Mark Mobius joined Templeton in 1987 as President of Templeton Emerging Markets Fund in Hong Kong. He currently directs 26 analysts based in Templeton’s eleven emerging markets offices and manages the emerging markets portfolios. Dr. Mobius has spent more than 30 years working in Asia and other parts of the emerging markets world. He travels constantly in order to stay in touch with these markets and meets with brokers and analysts wherever he goes. 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  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 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 at Vickers de Costa, an international securities firm. Before joining Vickers, he operated his 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 Enterprise Institute for Research in Korea and Thailand.

Dr. Mobius holds bachelor and masters degrees from Boston University and 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 three books: The Investor’s Guide to Emerging Markets, Mobius on Emerging Markets and Passport to Profits.

We have interviewed Mark Mobius many times and try to continue this each year. We found him in Tokyo on January 27 and again in Singapore on January 30 by telephone. He is always eager to talk about his investment philosophy and the countries where he invests. His favorite area remains Asia, where he has invested about 50% of his fund assets.

Scott: How are you Mark? When are you going to update your book, “Investing in Emerging Markets” now that it is ten years old? It says that there were only 24 markets foreigners could invest in by 1992. Would you tell us how this has expanded since then?

Mobius: We currently invest in 33 countries, but follow a larger number, which is constantly expanding for a total of 55.

Scott: How many portfolios do you manage now?

Mobius: We have 31 funds and portfolios.

Scott: Why are you in Tokyo?

Mobius: We have a Japan fund, which requires research.  More importantly, we like to keep in touch with Japanese companies to find out what they are doing in emerging markets. Finally, we have clients in Tokyo and need to visit with them.   I will be here until Thursday when I go to Singapore.

Scott: You presently manage Templeton Emerging Markets Fund, the largest of the funds, Templeton Dragon Fund, Templeton China World Fund and the Templeton Russia and East European Fund. Would you tell us something about these funds?

Mobius: Templeton Emerging Markets Fund (NYSE:EMF) is the largest and the oldest of the closed-end funds I manage.  EMF had assets of $152.9 million at year-end 2002. EMF owns a portfolio of securities in 28 countries with “emerging economies”. A definition of an emerging market, which we see as some of the most interesting investment areas in the world today, was formulated in 1986 by the International Finance Corporation, the World Bank subsidiary. It was one of the first organizations to promote capital markets development in the less developed countries. Starting with just 24 countries, we now have a list of 55 countries with stock exchanges. In 2002, the assets of Templeton Emerging Markets Appreciation Fund, an equity and bond fund, merged its assets into Templeton Developing Markets Trust. I managed the equity portion; the bond managers at Franklin Templeton managed the debt portion. Over the years, EMF has produced solid results despite ups and downs and with many problems such as currency devaluations. The average annual return of EMF based on changes in net asset value for the 10-year period ending December 31, 2002 was +11.5%. Of course, past performance is not predictive of future results.

Largest Country Allocation of EMF
as of December 2002

1.    South Korea 16.7%
2.    South Africa 16.0%
3.    Hong Kong 8.1%
4.    Brazil 6.1%
5.    Mexico 5.1%
6.    China 4.2%
7.    Indonesia 4.1%
8.    Taiwan 4.0%
9.    Thailand 3.5%
10.    Russia 3.3%
  Total 71.1%

Templeton China World Fund (NYSE:TCH) is directed at the Chinese markets. The assets of TCH at the end of 2002 were $177 million, and its average annual return since inception was +1.4%.

Templeton Dragon Fund (NYSE:TDF) is much larger than TCH, with assets of $440 million at the end of 2002. TDF was designed to benefit Japanese investors. Unlike TCH, the Fund does not have any trigger provision to open-end the Fund. It also has more flexibilities than TCH in investing in Japan and other Asian markets. The portfolio was invested 43.8% in China, 44.1% in Hong Kong and 8.7% in Taiwan at the end of 2002. The average annual return of TDF since inception has been +3.8%.

The Templeton Russia and East European Fund, Inc. (NYSE:TRF) is the only closed-end New York Stock Exchange-listed Russian fund. It is a way for people to get exposure to the Russian market. We also invest in some of the east European countries that are exposed to Russia. The average annual return of TRF since inception has been +8.9%.

Scott: Tell us about the situation in Russia?

Mobius: We have about 3% of our global portfolio in Russia now. We like UES the electric power company in spite of the debate over the reform of the electric power industry. Reform in the electric power sector is now under debate and things were delayed because of the upcoming election and the probability that Putin doesn’t want to make any dramatic moves right now. [On February 14, it was reported that the lower house of Russia’s Parliament approved legislation that allows the break-up of the country’s vast electricity network, clearing one of the final obstacles to what economists call the most far-reaching overhaul in President Putin’s economic program: reorganizing the world’s largest power grid.]

Scott: What has been the progress of corporate governance and other reforms since I last talked to you? Has there been progress in this area, Mark?

Mobius: Some progress has been made, but it has been slow, particularly in China. In our view, it will take a long time for changes to take place. China wants to protect their investors who have been taken for a ride. In spite of all this, they still have an enormous local market, some of the lowest production costs in the world and a highly skilled, precise labor force willing to work hard. They also have capital to invest. We can buy the “B” shares, companies based in Mainland China and traded in Shanghai and Shenzhen. However, we prefer the “H” shares and the “Red Chips” traded on the Hong Kong market. The “H” shares are Chinese registered companies listed on the Hong Kong market while the “Red Chips” are Hong Kong registered companies listed in Hong Kong but doing business in China. The “B” shares are the counterparts to the “A” shares both listed in Shanghai and Shenzhen. Previously, restricted to foreigners, “B” shares are now open to both locals and foreigners. Foreigners up to now couldn’t buy the “A” shares.

My second call was to Dr. Mobius in Singapore. He had many of his research analysts on the telephone who were happy to tell us about their areas.

Mobius: Gustavo, is Brazil burning or not?

Gustavo: There is a lot of expectation about what the new administration is going to do. They appointed good people to key cabinet positions and are sticking to a strict austerity program. They are doing everything by the book. What we want to see now is what will happen with the reforms. The most important are the national reforms and the deficits of the national pension fund system. The government has to take 4% of GDP from taxes to fund the pensions, so we will be in good shape if some of this problem can be solved.

Brazil needs to manage this. I think there is a consensus what needs to be done.

Scott: How about the inflation targets. Will they work?

Gustavo: They have changed from 12% to 8.5%. I think it is workable because last year they had a lot of pressure from the U.S. dollar versus the Real, which probably won’t be there anymore. The key is what will happen to the oil price. They might miss their targets, but I think it may work.

Mobius: Claus and Santiago are in Argentina. What is happening there?

Claus: Argentina just agreed with the IMF for a short-term loan agreement to bring the country through the election in April. We still have a lot of uncertainty here because there is no real candidate emerging and their proposals are very different. What happens depends on who wins. The exchange rate (to the dollar) has dropped about 70%, although it has stabilized to some extent for now.

Santiago: The political issue and the financial system are real concerns.  There isn’t a candidate with more than 15% support. The new government may not solve the problems we have. The inflation situation is critical although they do have capital controls.

Mobius: Currently they are restricting foreign exchange from leaving the country, and exporters have to keep their money at home. Global deflation has helped them to some extent. Now let’s move onto India. Tell us about their progress, Rakesh?

Rakesh: Basically, there are a lot of positives in the market. The ruling coalition has been gaining strength. We have eight state elections this year so they will try to keep the momentum going. There are also some tax reforms to reduce dividend and sales taxes. There has been a cabinet reshuffle and reform bills have been introduced in banking, electricity and the farm sectors. As a result, many companies are more efficient and exports have been growing by leaps and bounds this year while interest rates have declined. We also have the highest level of currency reserves ever this year.

Privatizations have been increasing. Instead of India relying just on software and pharmaceutical services, there likely will be renewed growth in manufacturing as well as an improving infrastructure particularly in engineering and the capital goods industries such as in the autos and outsourcing software services.

Mobius: Dennis, would you tell us about your recent trip to Thailand?

Dennis: We just got back from Bangkok. The economy is the most vibrant we have seen in our travels across Asia. Growth is expected at 6% this year. This is also the first time in sixty years that the government has an absolute majority in parliament so they have been able to put new policies through quicker. Therefore, the economy has turned around and is mainly consumer-driven.

After the currency devaluation of 1997 and the devaluation of the property sector last September and October, we saw that the banks were reporting much better numbers. A good sign for the banking system has been much restructuring and rescheduling of significant portions of the non-performing loans where the trend now looks quite interesting. In housing there is much pent-up demand.

Food is a major export item. We saw companies which process tuna and other seafood for Conagra and other American companies. Thailand is also a big exporter of coal and cement to the U.S. as well as auto assemblies and parts. For instance, Toyota has the lowest number of defects of all its plants. The stock market has been one of the best performing in the region. (According to a report in the New York Times, the Thai market is cheap, with shares priced at 7.5 times this year’s expected earnings, the economy is steaming ahead, estimated to grow 4% this year. It is one of the few countries where cash flow and profits are improving, rather than missing expectations).

[Editor's Note: There are two Thailand closed-end funds, Thai Fund (TF-NYSE) and (TTI-NYSE), both of which trade at discounts to their net asset values.

Scott: Mark, would you update us on South Africa, one of your largest sectors?

Mobius: The key there is terrific management, good corporate governance and cheap prices for many companies so it is a winning combination. That is why we are in such stocks as South African Breweries, Anglo American (metals and mining) and Old Mutual (insurance) and so forth. The Rand has gotten stronger which continues to help us so they have no problem in meeting their U.S. obligations. Many companies there are doing very well; in particular, those that have no overseas debt and a large amount of exports. We have added to our investments in this region because the currency is so undervalued and the companies, in our view, so well managed.

Scott: Are you putting much money into particular areas right now?

Mobius: We are not really changing things very dramatically. We have been putting a little into South Korea, but not in a big way.

Scott: We haven’t talked much about Korea. Would you update us?

Mobius: South Korea’s new president is a reformer. I think the markets are weak lately because they are afraid they will go after the Chaebols (conglomerates), which will have a negative impact. Generally the Koreans have done a terrific job in upgrading their industries and matching Japan in a number of areas. The computerization has been quite remarkable; they are the largest producers of D-Ram memory chips. Some of the big names such as Hyundai Auto and Samsung Electronics are doing well so I think the country is maturing very fast. Penetration of broadband is the highest in the world in Korea. We are focusing on companies that we think will survive.

Scott: We are looking towards world economic recovery and we know that the world oil price will help in recovery.

Mobius: Surprisingly, as the oil price rises in some of the countries the stock market goes up. It is a puzzling phenomenon and probably is related to the fact that many other variables enter into the equation. For example, in Thailand the Asian crises resulted in a lot of reforms being introduced and a great deal of restructuring. The devaluation of the Thai Baht resulted in an upsurge of exports. This coincided with the rise in oil prices but to date the export growth and general recovery in the Thai economy has overwhelmed any downside pressure from higher oil prices. The stock market was at very low levels for a long time and now is recovering despite high oil prices.

Scott: How would you summarize your views towards the emerging markets?

Mobius: As far as emerging markets are concerned, these countries are emerging from the Asian crisis of 1997, which reverberated around all these markets. They are now coming out of all of that. In our view, the valuations of these markets are quite remarkable in comparison at least to the U.S. with cheap price to earnings ratios, price to book, good yields and very undervalued currencies.

We want to emphasize that emerging markets are the place to be nowadays. In particular, South Africa and Korea because of the North Korea discount. We also see Indonesia and Brazil as relatively cheap as well as Argentina. It depends on which criteria to measure value you use. Of course, these are our current opinions and views, which can change based on changing market and economic conditions.

Scott: Thank you for your time, and I will stay in touch with you.

The closed-end funds managed by Franklin/Templeton are Templeton China World Fund, Inc. (NYSE:TCH), Templeton Dragon Fund, Inc. (NYSE:TDF), Templeton Emerging Markets Fund (NYSE:EMF), Templeton Emerging Markets Income Fund, Inc. (NYSE:TEI), Templeton Global Income Fund, Inc. (NYSE:GIM) and Templeton Russia and East European Fund, Inc. (NYSE:TRF) The funds’ investment advisers are subsidiaries of Franklin Templeton Resources, Inc. (NYSE:BEN), a global investment organization operating as Franklin Templeton Investments. Franklin Templeton Investments provides global and domestic investment management services through its Franklin, Templeton, Mutual Series and Fiduciary Trust subsidiaries. The San Mateo, CA-based company has over 50 years of investment experience and more than $256 billion in assets under management as of January 31, 2003. For more information, please call 1-800-342-5236.

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