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Interview: The Mark of the Master

The legendary fund manager reveals the depth of emerging markets and what they portent for the future

Mark Mobius spends more than half the year in transit between various destinations more often than not in what have come be termed "emerging markets". His quest as always is for undervalued companies- those hidden gems that somehow seem to escape the scrutiny of others with lesser acumen. J. Mark Mobius, the managing director of Templeton Asset Management, is possibly the most successful face of itinerant investing. He has acquired near-cult status as a pioneering investor riding the troughs and peaks in emerging markets, uncovering undervalued companies that benefit from long-term growth of their economies, over the last three decades. His shaved head is as iconic as is his uncanny ability to bag bargains driven by a lifestyle that is driven to say the least. Visiting 7-8 companies in single day, checking out their innards, is all a day's work for the man who gives an insight into his credo in his book 'Passport to Profits': ""I have taken bone-jolting rides on mountain roads that would have turned my hair gray if I had any left to turn. All to find undervalued companies before other investors do . . . "

Yet Mobius is more, lot more, than just a fund manager-his interests range from fine arts to psychology and economics, all capped by degrees from cross the globe.

Excerpts from an interview with the legendary emerging markets investor.

What are the differences between emerging markets of 1986 and 2006? What has changed for the fund manager? What has changed for the investor?
The main difference between 1986 and 2006 is the size and liquidity. Emerging markets are much larger now than they were in 1986 and liquidity is also much greater. In addition, the amount of money we manage is far greater. In 1987, we were managing $100 million. Today, it is close to $30 billion. The number of markets in 1987 in which we could invest was only six but today we are able to invest in over 40 markets. In 1986, the idea of investing in Russia, China, South Africa or India was out of question. Of course eastern Europe was also out of question. But today, we are investing in all those countries.

Which micro- or macro-economic event/news ever has had the most negative impact on the performance of your fund and how did you react?
The most important economic event was probably the collapse of the Thai baht in 1997. This started a domino effect throughout Asia and then the emerging markets world over. Our reaction was to buy more stocks as they tumbled but, of course, we were limited in our ability to do that because of the redemptions. So in many cases we had to sell. However, the buying that we were able to do helped us greatly when stock prices improved.

What are the most important factors on which your investment decisions are based?
Our investment decisions are based on a close examination of the companies in which we invest. We study five-year history of balance sheets, profit and loss numbers, and cash flow numbers. We then visit the company and interview the management in order to assure ourselves that the management is capable and willing to practice good corporate governance. We also talk to the competitors. We get an understanding of the industry in which the company competes. In sum, we look at all the aspects of the company so that we have a thorough and complete picture. That's why we have offices across the emerging markets which enables our analysts to conduct on-the-ground research and search for opportunities.

What are the most important strengths of a good fund manager?
A good fund manager must be a hard worker, willing to spend long hours on study, travel and thinking. He must be patient and dedicated to the interests of his investors. He must be ready for surprises and act with a cool head when confronted with such surprises. Fund management is a 24 hour, 7 days a week responsibility. He must be interested in everything and be curious to learn more and more.

We see low volatilities in your funds, how do you keep risk at minimum?
Although risk is often defined as volatility, the best way to reduce risk is by intense and continuous study of the companies in which you invest. This way, you will have confidence to keep your investments without moving in and out on unreliable news or rumors. Moreover, with such study you will detect warning signals which may lead you to sell.

For a typical fund investor (with a rather defensive profile), what percentage of the portfolio may be invested in emerging market equities?
That depends on a lot of individual factors which each investor must examine given his own requirements and risk tolerance. However, emerging markets equities represent about 12% of the world's equity markets so that could be one benchmark.

What is your opinion on the current state of stock markets? What are your expectations for emerging markets?
Current stock markets generally are not expensive by historical standards. In emerging markets, the situation is rather good because the emerging markets stocks are selling at better valuations than US or European stocks with lower price/earnings ratios, lower price to book ratios and higher dividend yields.

As long as that situation continues, we feel that emerging markets are in a good environment.

However, given that the emerging market stocks have performed so well in the recent years, we can certainly expect some corrections from the current levels.